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CORPORATE REPORTING

PROFESSIONAL 1 EXAMINATION - APRIL 2015

NOTES:
You are required to answer Questions 1, 2 and 3. You are also required to answer either Question 4 or 5.
(If you provide answers to both Questions 4 and 5, you must draw a clearly distinguishable line through the
answer not to be marked. Otherwise, only the first answer to hand for Question 4 or 5 will be marked.)

Note: Students have optional use of the Extended Trial


Balance, which if used, must be included in the answer booklet.

Provided are pro-forma:

Statements of Profit or Loss and Other Comprehensive Income By Expense, Statements of Profit or Loss
and Other Comprehensive Income By Function, and Statements of Financial Position.

TIME ALLOWED:
3.5 hours, plus 10 minutes to read the paper.

INSTRUCTIONS:
During the reading time you may write notes on the examination paper, but you may not commence
writing in your answer book. Please read each Question carefully.

Marks for each question are shown. The pass mark required is 50% in total over the whole paper.

Start your answer to each question on a new page.

You are reminded to pay particular attention to your communication skills, and care must be taken
regarding the format and literacy of your solutions. The marking system will take into account the
content of your answers and the extent to which answers are supported with relevant legislation, case
law or examples, where appropriate.

List on the cover of each answer booklet, in the space provided, the number of each question
attempted.

NB: PLEASE ENSURE TO ENCLOSE YOUR ANSWER SHEET TO QUESTION 3 IN THE


ENVELOPE PROVIDED.

The Institute of Certified Public Accountants in Ireland, 17 Harcourt Street, Dublin 2.


THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND

CORPORATE REPORTING
PROFESSIONAL 1 EXAMINATION – APRIL 2015
Time allowed 3.5 hours, plus 10 minutes to read the paper.
You are required to answer Questions 1, 2 and 3. You are also required to answer either Question 4 or 5.
(If you provide answers to both Questions 4 and 5, you must draw a clearly distinguishable line through the
answer not to be marked. Otherwise, only the first answer to hand for Question 4 or 5 will be marked.)
You are required to answer Questions 1, 2 and 3.
1. The following Statements of Profit or Loss and Other Comprehensive Income relate to Plover plc (Plover) and its
investee companies, Starling plc (Starling) and Finch plc (Finch).

Statements of Profit or Loss and Other Comprehensive Income for year ended 31 March 2015

Plover plc Starling plc Finch plc

Revenue ... 976.0 420.0 63.0


€ million € million € million

Cost of Sales ... (687.0) (228.0) (26.2)


Gross profit … 289.0 192.0 36.8

Operating expenses ... (68.0) (54.0) (13.4)


Finance costs ... (12.0) (18.0) (6.2)
Other income … 6.1 - -
Dividend received ... 8.1 - -
Profit before taxation ... 223.2 120.0 17.2

Taxation … (45.0) (30.0) (3.2)


Profit for the year ... 178.2 90.0 14.0

Other comprehensive income:


Gains on revaluations of property 15.0 12.0 2.0
Total comprehensive income for the year 193.2 102.0 16.0

Reserve balances total at 1 April 2014 2,350.0 625.0 145.0


Equity share capital at 1 April 2014 1,000.0 775.0 10.0

The following additional information may be relevant:

(i) Plover bought a 60% holding in the equity of Starling on 1 April 2014. The purchase price of the investment was
agreed at €900 million, of which €600 million was paid in cash. The balance was satisfied by the immediate issue
of a 5% 2024 bond to the seller at par value. Starling’s net assets had a fair value of €1,400 million on 1 April
2014, represented by equity share capital €775 million and retained earnings €625 million. It was decided to
apply the proportion of net assets method to calculate goodwill on acquisition. No impairment loss arose during
the year.
(ii) The interest on the above loan notes is payable annually in arrears. The first year’s interest payment has not yet
been made, nor has it been provided for.
(iii) Plover sold its entire 60% holding in Starling on 31 March 2015 for €1,150 million in cash. No entry has yet been
made to reflect this transaction. Ignore taxation on this transaction.
(iv) Plover has owned 90% of the equity shares in Finch since incorporation. No goodwill arose on this acquisition.
There were no reserves in existence at the acquisition date.
(v) During the year, Plover sold goods to Finch for €15 million. These goods were sold by Plover at a mark-up of
50% on cost price. Three fifths of the goods remained in the inventory of Finch at 31 March 2015. An amount of
€4.3 million remained outstanding to Plover in respect of these goods at 31 March 2015.
(vi) On 1 March 2015, Finch declared an interim dividend of €9 million. Plover has recorded its share of this dividend
as income. No other dividends were declared by group companies.
(vii) All calculations may be taken to the nearest €0.1 million. Assume all expenses and gains accrue evenly
throughout the year unless otherwise instructed. No new equity capital was issued by any group company during
the year.

Page 1
REQUIREMENT:

Calculate the consolidated gain or loss on the disposal of the shares in Starling on 31 March 2015, in accordance
with IFRS. Show the journal entries required to record the disposal in the group financial statements.
(a)

(9 marks)

Prepare the consolidated Statement of Profit or Loss and Other Comprehensive Income for the Plover Group for
year ended 31 March 2015 in accordance with IFRS.
(b)

(13 marks)

Prepare the consolidated Statement of Changes in Equity for the Plover Group for year ended 31 March 2015,
showing equity share capital and reserves. The non-controlling interest column is not required.
(c)

(6 marks)

Format & Presentation (2 marks)

[Total: 30 MARKS]

Page 2
2. The following trial balance was extracted from the books of Peppercorn plc (Peppercorn) on 31 March 2015.

Note Dr Cr

Revenue 372
€ million € million

Cost of sales 221


Distribution costs 46
Administration expenses 74
Land and buildings at valuation 1 April 2014 (i) 62
Plant and equipment at cost (ii) 60
Accumulated depreciation 1 April 2014 - plant and equipment (ii) 20
Intangible assets at cost (iii) 30
Financial assets at fair value 1 April 2014 (iv) 70
Inventory at 31 March 2015 18
Trade receivables 69
Cash and bank 26
Trade payables 28
Equity shares of €1 each (vii) 90
Share premium account 30
Revaluation surplus (i) 10
Equity investment reserve (iv) 15
7% Debentures (v) 40
Suspense account (ii) 11
Retained earnings reserve 1 April 2014 82
687 687

(i) Peppercorn applies the revaluation model of IAS 16 Property, Plant & Equipment to its land and buildings. The
The following notes may be relevant to your answer:

revaluation surplus reserve relates entirely to previous revaluations of this category of asset. A revaluation took
place on 31 March 2014 and resulted in the fair value of €62 million shown above. This figure included €22
million in respect of land. The buildings were deemed to have a 40-year useful economic life remaining at that
date. No depreciation has yet been charged for the accounting period ended on 31 March 2015. All depreciation
is charged to cost of sales.

On 31 March 2015, a further revaluation took place which revealed a fair value of €24 million for the land, and
€41 million for the buildings. This is to be recorded in the books in accordance with the accounting policy of
Peppercorn.

(ii) Plant & equipment is being depreciated at 25% per annum straight line from the date of purchase to the date of
sale. On 1 October 2014, a piece of plant was purchased at a cost of €12 million. This replaced another piece of
plant which had cost €8 million some years ago and was fully depreciated prior to 31 March 2014. A trade-in
allowance of €1 million was received for the old plant. The only entries made to record this transaction were to
credit cash and debit suspense with the net payment of €11 million. No other item of plant was more than three
years old at 1 April 2014.

(iii) Intangible assets consist of capitalised development costs of €30 million. These relate to products in
development at 1 April 2014. No revenue has yet been earned from any of these products. They are all expected
to be successful once ready for market, with the exception of one project. The amount previously capitalised in
respect of this project was €6 million. However, adverse developments have led to the decision to abandon the
project as it was unlikely to be successful in the marketplace. During the year further expenditure was incurred
on other qualifying projects and was charged to administration expenses. The amounts are as follows:

1) Prototype development costs €3 million


2) Marketing research to determine the optimal selling strategy €1 million
3) Basic research which may lead to future projects €4 million

(iv) The figure for financial assets represents the fair value of equities held at 1 April 2014. As permitted by IFRS 9
Financial Instruments, an election was made at the date of purchase to account for any fair value gains and
losses on all these equity investments through “other comprehensive income”. Peppercorn takes such gains and
losses to a separate component of equity, the equity investment reserve. The fair value of the equity investments
at 31 March 2015 was €63.5 million. No equities were purchased or sold during the year.

Page 3
(v) The 7% debentures were issued on 1 April 2014 at par value. There is a premium payable on redemption which
has the effect of raising the effective annual finance cost to 8.5%. Coupon interest is payable annually in arrears.
No interest has been provided for or paid as at 31 March 2015.

(vi) Corporation tax for the year was estimated at €0.5 million.

(vii) An equity dividend of €0.06 per ordinary share was proposed before the reporting date and is expected to be
approved at the next AGM. No entry has yet been made to reflect this proposal.

REQUIREMENT:

Prepare, in a form suitable for publication to the shareholders of Peppercorn plc the:

(a) Statement of Profit or Loss and Other Comprehensive Income of Peppercorn plc for the year to 31 March 2015;

(12 marks)
Format & presentation (1 mark)

(b) Statement of Changes in Equity for year ended 31 March 2015; (5 marks)

Statement of Financial Position as at 31 March 2015. (11 marks)


Format & presentation (1 mark)
(c)

[Total: 30 MARKS]

Notes to the financial statements are not required but all workings should be shown.

Page 4
3. The following multiple-choice question contains eight sections, each of which is followed by a choice of
answers. Only one answer is correct in each case. Each question carries equal marks.

Provide your answer to each section on the answer sheet provided.


REQUIREMENT:

1. Which of the following statements is NOT a requirement of IAS 1 Presentation of Financial Statements?

(a) Items of profit or loss and other comprehensive income must be identified separately through two separate
statements or one combined statement.
(b) Changes in equity relating to transactions with owners must be shown in the Statement of Changes in
Equity.
(c) Detailed formats as laid out for each financial statement must be followed.
(d) Comparative information must generally be disclosed in respect of the preceding accounting period.

2. IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors provides for two primary methods of
accounting for these matters, retrospective and prospective. Retrospective changes involve changing prior years’
figures reported in the annual report, even if previously published, to read as they would have read if the change
or correction had always been in place. Prospective changes affect the financial statements from the date of the
change going forward. Which of the following is correct?

(a) Correction of material error Retrospective


Accounting change proposed Retrospective or prospective

(b) Change of accounting estimate Retrospective


(c) Change of accounting policy Prospective
(d) None of the above.

3. IAS 12 Income Taxes sets out guidance for dealing with the under or overprovision of income taxes by reporting
entities. During the year ended 31 March 2015, Freddy plc finalised and paid its liability for corporation tax on
profit for year ended 31 March 2014, at an amount of €42 million. It had previously made an estimated provision
for corporation tax of €50 million in the financial statements for year to 31 March 2014. The directors estimate
the liability for year ended 31 March 2015 at €49 million. What figures should appear in the financial statements
of Freddy plc for year ended 31 March 2015 in respect of taxation?

(a) €49 million €49 million


Profit or Loss (charge) Statement of Financial Position (liability)

(b) €41 million €41 million


(c) €57 million €49 million
(d) €41 million €49 million

4. During the financial year ended 31 March 2015, Gerry plc delivered goods at an invoice value of €300,000 to a
potential customer on a ‘sale or return’ basis. These goods cost Gerry plc €240,000. No payment was received.
There was no indication at the reporting date or since as to whether the goods will be returned or not.

Under IAS 18 Revenue, how much should be reported as (1) Revenue, (2) Receivables and (3) Inventory in
respect of the above goods?

(a) NIL
Revenue Receivables Inventory

(b) NIL
€300,000 €240,000

(c) NIL NIL


€300,000 €300,000

(d) NIL NIL


€300,000
€240,000

5. Which of the following should NOT cause the recognition of a provision under IAS 37 Provisions, Contingent
Liabilities and Contingent Assets?

(a) A contractual warranty offered on 5,000 units of a product sold, where each product has a 1% chance of
being faulty.
(b) A legally enforceable promise to decommission an asset in 25 years’ time.
(c) A customary practice of accepting sales returns beyond the legally required time period.
(d) The expectation of a major repair cost in the next accounting period.
Page 5
6. The directors of Sophie plc provided the following information in respect of the year ended 31 March 2015.

• Opening trade receivables were €30 million.


• Sales revenue for year was €90 million.
• Trade receivables disposed of with subsidiaries amounted to €3 million.
• Trade receivables worth €5 million were acquired through the acquisition of a subsidiary.
• Settlement discounts allowed to customers during the year amounted to €1 million.
• Closing trade receivables were €42 million.

What was the cash received from customers for the year ended 31 March 2015 based on the above information?

(a) €102 million


(b) €80 million
(c) €79 million
(d) €75 million

7. During the year ended 31 March 2015, the directors of Teresa plc decided to sell a building no longer needed for
use in the business. Which of the following is NOT normally required for this building to be accounted for as a
non-current asset held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued
Operations?

(a) The building must be available for immediate sale in its present condition.
(b) The building must be sold within 1 year of classification as ‘held for sale’.
(c) The building must be the subject of an active plan to locate a buyer.
(d) The building must be marketed at a price that is reasonable in relation to its fair value.

8. The Financial Reporting Council (FRC) has recently issued FRS 100, FRS 101 and FRS 102 (FRS 100-102). For
entities domiciled in Ireland, that wish to prepare financial statements that are intended to give a true and fair view
of the assets, liabilities, financial position and profit or loss for a period, with a reporting period on, or after, 1
January 2015, please see the following statements:

(i) FRS100-102 are mandatory, for entities not applying ‘Full International Financial Reporting Standards
(IFRS), for reporting periods beginning on or after 1 January 2015.
(ii) FRS100-102 are not relevant as they are issued by a UK body.
(iii) FRS 101 may be applied by a qualifying entity.
(iv) Unless IFRS are being applied FRS100-102 represent best practice (for entities domiciled in Ireland, that
wish to prepare financial statements that are intended to give a true and fair view of the assets, liabilities,
financial position and profit or loss for a period).

Regarding the above statements, which of the following options is most correct?

(a) (i) and (iv) only.


(b) (ii) only.
(c) (i), (iii) and (iv) only.
(d) (i) and (iii) only.

[Total: 20 MARKS]

Page 6
Answer either Question 4 or Question 5
The effective interest rate method is a way of allocating the finance costs associated with a financial liability to
appropriate accounting periods. It seeks to charge each accounting period with an appropriate portion of these
4.
costs based on applying a constant percentage rate to the outstanding balance at any given time. This method
is required by IAS 17 Leases to account for finance leases, as well as by IFRS 9 Financial Instruments to account
for financial instruments held at amortised cost. It is believed that this method results in a fairer distribution of
finance cost than alternative methods such as straight line and sum of the digits.

On 1 April 2014, Robby plc issued a bond with the following terms:

• The bond had a par value of €100 million.


• The bond has a coupon interest rate of 5% and is payable annually in arrears.
• The term of the bond is 4 years.
• The bond is redeemable on 31 March 2018 at a premium of 6%.
• The issue price of the bond was €96 million.
• Costs associated with issuing the bond were €2 million.

The effective interest rate has been calculated at 8.146%. Present value interest factors at 8.146% are as follows:

• 1 year 0.9247
• 2 years 0.8550
• 3 years 0.7906
• 4 years 0.7311

REQUIREMENT:

(a) Outline what is meant by each of the terms underlined above. (4 marks)

In the case of the bond referred to above, calculate the finance costs over its lifetime. Show the amount of this
cost that would be allocated to each accounting period under (i) the straight line method, and (ii) the effective
(b)

interest rate method. Assume the accounting period ends on 31 March each year.
(10 marks)

(c) Why is the effective interest rate method deemed to be superior to the others? (6 marks)

[Total: 20 MARKS]

OR

Page 7
5. International Financial Reporting Standards (IFRS) support the use of fair values when reporting the values of
assets wherever practical. This involves periodic remeasurements of assets and the consequent recognition of
gains and losses in the financial statements. There are several methods of recognising gains and losses on
remeasurement of assets required by IFRS.

REQUIREMENT:

Advise how IFRS require gains or losses on remeasurement to be dealt with in the financial statements in the
case of each of the following assets. The calculation of such gains or losses is not necessary, merely their
(a)

accounting treatment. Your answer should indicate clearly where in the performance statement each component
of gain or loss should appear.

(i) Property, plant & equipment held under the revaluation model of IAS 16. (4 marks)
(ii) Investment property held under the fair value model of IAS 40. (2 marks)
(iii) Financial assets held at fair value under IFRS 9. (4 marks)

In each case (i) and (ii) below, outline briefly the appropriate accounting treatment and show the journal entries
in the financial statements of Williamson plc (Williamson) for year ended 31 March 2015, resulting from recording
(b)

the events described. Any entry affecting the performance statement must be clearly classified as either ‘profit or
loss’ or ‘other comprehensive income’. Williamson adopts the revaluation model of IAS 16 Property, Plant &
Equipment and the fair value model of IAS 40 Investment Property. Williamson chooses to recognise any fair
value gains or losses arising on its equity investments in ‘other comprehensive income’ as permitted by IFRS 9
Financial Instruments.

(i) Williamson owns a piece of property it purchased on 1 April 2012 for €3.5 million. The land component of
the property was estimated to be €1 million at the date of purchase. The useful economic life of the building
on this land was estimated to be 25 years on 1 April 2012. The property was used as the corporate
headquarters for two years from that date. On 1 April 2014, the company moved its headquarters to
another building and leased the entire property for five years to an unrelated tenant on an arms length basis
in order to benefit from the rental income and future capital appreciation. The fair value of the property on
1 April 2014 was €4.1 million (land component €1.9 million), and on 31 March 2015, €4.8 million (land
component €2.1 million). The estimate of useful economic life remained unchanged throughout the period.
Land and buildings are considered to be two separate assets by the directors of Williamson.
(5 marks)

(ii) Williamson holds a portfolio of equity investments the value of which was correctly recorded at €12 million
on 1 April 2014. During the year ended 31 March 2015, the company received dividends of €0.75 million.
Further equity investments were purchased at a cost of €1.6 million. Shares were disposed of during the
year for proceeds of €1.1 million. These shares had cost €0.4 million a number of years earlier but had
been valued at €0.9 million on 1 April 2014. The fair value of the financial assets held on 31 March 2015
was €14 million.
(5 marks)

[Total: 20 MARKS]

END OF PAPER

Page 8
SUGGESTED SOLUTIONS
THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND

CORPORATE REPORTING
PROFESSIONAL 1 EXAMINATION – APRIL 2015

SOLUTION 1

Marking Scheme:

Gain or loss on disposal


Recognition that calculation involves sale proceeds less carrying value 1
(a)

Calculation of carrying value of identifiable net assets at date of disposal 3


Calculation of goodwill at acquisition and disposal 1
Calculation of NCI at date of disposal 1
Journal to record acquisition 3
Subtotal 9

Statement
Basic consolidation plan (100% Plover + 100% Starling + 100% Finch) 4
(b)

Interest on loan note (calculation and inclusion in expenses) 1


Intra-group revenue and purchases (exclusion) 2
Unrealised profit (calculation and elimination) 2
Exclusion of intragroup dividend from SPLOCI 1
Calculation and attribution of results to NCI and owners of parent 3
Presentation 1
Subtotal 14

Statement of changes in equity


Calculation of opening balances 2
(c)

Inclusion of TCI for year 1


Calculation of closing balances 3
Presentation 1
Subtotal 7

[Total: 30 Marks]

Page 9
Suggested solution

Sale proceeds 1,150


(a) Calculation of consolidated gain or loss on disposal: €m €m

Carrying value in group accounts at date of disposal:


Equity share capital 775
Reserve balances (625 + 102) 727
1,502
Group share 60% 901.2
Goodwill on parent’s share (see working below) 60
(961.2)
Gain on disposal 188.8

Working: Goodwill on acquisition of Starling:


Cost of investment 900
Value of NCI (40% * 1,400) 560
Fair value of identifiable net assets acquired
Equity share capital 775
Reserves 625 (1,400)
Goodwill 60

Dr Cash received on disposal 1,150


Journal entry to record acquisition in group financial statements: DR€m CR€m

Dr NCI derecognised [560 + (40% * 102)] OR [1,502 – 901.2] 600.8


Cr Identifiable net assets sold and derecognised 1,502
Cr Goodwill derecognised 60
Cr profit or loss 188.8

When any asset is disposed of we need to work out the gain or loss on disposal. That is normally calculated by taking
Tutorial notes:

the sales proceeds less the carrying value on the date of sale. In the case of a subsidiary, the carrying value in the
group accounts is the book value of the identifiable net assets acquired, plus any profit or loss recognised since
acquisition including any group adjustments, plus any goodwill net of any impairment losses. The portion of the
carrying value to be matched against the proceeds is the parent’s share (here 60%).

In showing the actual journal entries, the parents share is derecognised by eliminating 100% of the net assets of
the subsidiary (as these are 100% shown in the group financial statements) less the non-controlling interest
(calculated as the balance at acquisition plus NCI share of any profits or losses recognised since acquisition).

Goodwill is derecognised separately as it is never included in the identifiable net assets at acquisition. Goodwill is
calculated as a separate asset and presented in the group statements only. As the method used to calculate goodwill
in this case (proportion of net assets) results in goodwill attributed to the parent only, the full amount is deducted
from the proceeds on disposal.

If goodwill had been calculated using the fair value method, it would be attributable to the parent and the NCI. In
this case the share of net assets attributable to the parent would be the total less the NCI (where the NCI would
include goodwill).

Had we been asked to show the gain or loss in the parent’s books (as opposed to in the group accounts) the
calculation would be much easier. This is because to carrying value in the parents books is likely to be its cost. Hence
the profit on disposal would be the proceeds less cost. Here, this would be 1,150 – 900 = €250 million.

Page 10
Plover controls Starling for the entire year, having purchased it on the first day of the financial year, and sold
it on the last. Plover also controls Finch, having held 90% of the shares since incorporation.
(b)

Hence consolidation plan = 100% Plover + 100% Starling + 100% Finch

Plover plc: Consolidated statement of profit or loss and other comprehensive income for year ended
31 March 2015

Revenue (976 + 420 + 63 – 15 (v)] 1,444.0


(100% Firestack + 100% Smokey*4/12) € million

Cost of Sales [687 + 228 + 26.2 – 15 (v) + 3 (v)] (929.2)


Gross Profit 514.8
Operating expenses [68 + 54 + 13.4] (135.4)
Finance costs [12 + 18 + 6.2 + 15 (ii)] (51.2)
Other income (6.1) 6.1
Dividend received [8.1 – 8.1 (vi)] 0
Gain on disposal of shares in group companies (iii) 188.8
Profit before taxation 523.1
Taxation (45 +30 +3.2) (78.2)
Profit for the year 444.9
Other comprehensive income (Amounts that will not be reclassified to profit or loss):
Gains on revaluation of property (15 +12 +2) 29.0
Total comprehensive income for the year 473.9

Profit for the year attributable to:


Owners of the parent (balancing figure 444.9 – 37.4)) 407.5
Non-controlling interest (viii) (36 + 1.4) 37.4
444.9
Total comprehensive income attributable to:
Owners of the parent (balancing figure 473.9 – 42.4) 431.5
Non-controlling interest (viii) (40.8 + 1.6) 42.4
473.9

Provide for interest payable on loan note 5% * €300m = €15 million


Working (ii) / Note (ii)

Include in finance costs. As this is an expense of the parent, NCI is not affected.

See solution to part (a) above. Include gain on disposal within profit or loss. As the disposal was made by the
Working (iii)

parent there is no impact on NCI on profit for the year. NCI will still share in the profit earned during the year.

Eliminate intra-group sales and purchases (€15m) in full from group revenue and group cost of sales.
Working (v)

Unrealised profit provision required = 15m * 50/150 * 3/5 = €3m


This figure increases cost of sales, as the closing inventory reduces.
NCI is not affected as Plover (parent) was the internal selling company that recorded the gain.

The intra-group balance outstanding has no impact on the SPLOCI.

Intra-group dividends should not be recorded as income in the group financial statements. Hence we should
Working (vi)

eliminate the €8.1 million that was recorded (9 million * 90%).

Page 11
Working (viii) – non-controlling interest Starling Finch
Profit €m TCI €m Profit €m TCI €m
per SPLOCI 90 102 14 16
NCI percentage 40% 40% 10% 10%
NCI amount 36.0 40.8 1.4 1.6

(c) Plover plc: Consolidated statement of changes in equity for year ended 31 March 2015

Balance 1 April 2014 1,000 2,480.5 3,480.5


Equity share capital Reserves Subtotal

TCI for year 431.5 431.5


Balance 31 March 2015 1,000 2,912.0 3,912.0

Working: Consolidated reserves 1 April 2014 31 March 2015


€ million € million
Plover 2,350 +193.2 2,543.2
Starling (not in group at 1 April 2014) 0 102 * 60% 61.2
Finch (145 – 0) * 90% 130.5 (145 + 16 - 9) * 90% 136.8
URP on intra-group inventory (v) (3.0)
Gain on disposal of shares in group company 188.8
Interest on 5% loan notes (i) (15.0)
Total 2,480.5 2,912.0

Note: Consolidated reserves are calculated by taking at each relevant date the parent’s figure plus the parent’s
share of the post acquisition reserves of each subsidiary, less adjustments.

The closing reserves figure of Finch (100%) is its opening figure €145 million, plus its TCI for the year (€16m)
less dividend declared for the year (€9m). As this company was acquired at incorporation there were no
reserves at that date. Hence the group’s share of this is 90%, or €136.8 million.

Page 12
SOLUTION 2

Marking Scheme:

Statement of profit or loss and other comprehensive income


Transfer of figures from trial balance to appropriate headings 2
(a)

Capitalisation of overheads into buildings cost and exclusion from admin exp. 1
Capitalisation of interest into buildings cost and exclusion from finance costs 1
Depreciation on buildings (calculation and inclusion in expenses) 1
Depreciation on plant & equipment 1
Exclusion of sale or return goods from revenue 1
Inclusion of sale or return goods in closing inventory at cost price 1
Adjustment to admin expenses re warranty provision 1
Tax (calculation and recognition in P/L) 1
Preference dividend (calculation and inclusion in finance costs) 1
Presentation of gain on remeasurement of equity investments within OCI 1
Presentation 1
Subtotal 13

Statement of Changes in Equity


Transfer of figures from trial balance to appropriate headings 1
(b)

Eliminate recognition of brand from revaluation surplus 1


Transfer of SPLOCI figures to correct equity account 2
Calculation of dividend proposed and deduction from retained earnings 1
Subtotal 5

Statement of Financial Position


Transfer of figures from trial balance to appropriate headings 2
(c)

Correct capitalised amount for new building 1


Depreciation of plant & equipment 1
Depreciation of buildings 1
Elimination of sale or return goods from trade receivables 1
Inclusion of sale or return goods in inventory at cost 1
Gain on equity investments (calculation and recognition in NCA) 1
Transfer of figures from SOCIE to reserves 1
Equity dividends proposed (calculation and inclusion in liabilities) 1
Tax (recognition as liability net of existing balance) 1
Preference dividends (calculation and recognition as liability) 1
Warranty provision (calculation and inclusion of correct amount in liabilities) 1
Presentation 1
Subtotal 14 - Max 12

[Total: 30 Marks]

Page 13
Suggested solution

(a) Peppercorn plc: Statement of Profit or Loss and Other Comprehensive Income for year ended 31
March 2015

€ million
Revenue (372) 372.0
Cost of Sales (221 +1 (i) + 14.5 (ii) (236.5)
Gross profit 135.5
Distribution costs (46) (46.0)
Administration expenses (74 + 6 (iii) – 3 (iii) (77.0)
Gain on disposal of plant (ii) 1.0
Finance costs (3.4 (v) (3.4)
Profit before tax 10.1
Tax (vi) (0.5)
Profit for the year 9.6

Other comprehensive income: Items that will not be reclassified to profit or loss
Gain on revaluation of land & buildings (i) 4.0
Loss on revaluation of financial assets (iv) (6.5)
Total comprehensive income for the year 7.1

(b) Peppercorn plc Statement of Changes in Equity for year ended 31 March 2015

Share Share Revaluation Retained Equity Total


Capital Premium Surplus Earnings Inv. Equity
€million €million €million €million €million €million
Balance 1 April 2014 90.0 30.0 10.0 82.0 15.0 227.0
Total comprehensive income 4.0 9.6 (6.5) 7.1
Dividends declared ___ ___ __ (5.4) __ (5.4)
Balance 31 March 2015 90.0 30.0 14 86.2 8.5 228.7

Page 14
€ million
Non-current assets:
(c) Peppercorn plc Statement of Financial Position as at 31 March 2015

Land & buildings, (62 – 1 (i) +4 (i) 65.0


Plant & equipment (60 - 20 – 14.5 (ii) + 12 (ii) 37.5
Intangible asset (30 – 6 (iii) +3 (iii) 27.0
Financial assets (70 – 6.5 (iv) 63.5
193.0
Current assets:
Inventory (18 18.0
Trade receivables (69 69.0
Cash & bank (26 26.0
113.0
Total assets: 306.0

Equity:
Equity share capital (b) 90.0
Share premium (b) 30.0
Revaluation surplus (b) 14.0
Equity investments reserve (b) 8.5
Retained earnings (b) 86.2
228.7
Non-current liabilities:
7% debenture (40 + 0.6 (v)) 40.6
40.6
Current liabilities:
Trade payables 28.0
Debenture interest due (v) 2.8
Corporation tax due (vi) 0.5
Equity dividend due (vii) 5.4
36.7
Total equity & liabilities 306.0

Depreciation on buildings for the year needs to be provided for. Amount (62 – 22) / 40 years * 1 year = €1
Working (i) / note (i)

million

Dr Cost of sales 1.0


Cr Accumulated depreciation - buildings 1.0

Revaluation of land and buildings takes place on 31 March 2015 AFTER depreciation for the year has been
charged. Land shows a gain of (24-22) €2 million. Buildings shows a gain of (41 – 39) €2 million. Total gain
€4 million.

Dr Land & buildings 3.0


Dr Accumulated depreciation – buildings 1.0
Cr Revaluation surplus 4.0

Revaluation gains and losses are calculated by deducting the carrying amount at the date of revaluation from
Tutorial note:

the revalued amount. The accounting entry is to eliminate any accumulated depreciation accrued at the date
of revaluation and adjust the asset account to equal the revalued amount.

Page 15
The new plant is depreciated for 6 months from the date of purchase to the reporting date. The amount of this
Working (ii)

depreciation is €12 million * 25% * 6/12 = €1.5 million

The remaining plant falls into two categories. First, the plant traded in, costing €8 million, was fully depreciated
at the beginning of the period. Hence no depreciation remains to be charged on this plant. Second, the
balance of the plant, €52 million, is depreciated for a full year as none of it is more than three years old. This
means there is at lease a full year remaining in its useful economic life. Depreciation amount €52 million *
25% = €13 million.

Record depreciation on plant & equipment (1.5 + 13 = €14.5 million):

Dr Cost of sales 14.5


Cr Accumulated depreciation – plant & equipment 14.5

The new plant has not yet been capitalised into the plant account. Also, the old plant shows a gain on disposal
on €1 million as it was fully depreciated, yet generated economic benefit on disposal of €1 million.

Record new plant correctly, eliminate suspense account, and record gain on disposal of old plant:

Dr Plant & equipment 12.0


Cr Profit or loss (gain on disposal) 1.0
Cr Suspense 11.0

€6 million needs to be written off with respect to the project that is no longer expected to be successful. This
Working (iii)

judgment means that the IAS 38 criteria for capitalisation are not met in respect of this project.

Eliminate €6 million from intangible assets:


Dr Administration expenses 6.0
Cr Intangible assets 6.0

Among the further expenses, the €3 million for prototype development should be capitalised. The other
amounts are correctly charged to administration expenses.

Capitalise €3 million to intangible assets:


Dr Intangible assets 3.0
Cr Administration expenses 3.0

Under IFRS 9 the gain or loss may be taken to OCI provided an irrevocable election to do so has been made
Working (iv)

on the date of purchase. Here, the gain is 63.5 – 70, or a loss of €6.5 million.

Record loss on revaluation of equity investments:


Dr OCI – loss on revaluation of financial assets 6.5
Cr Financial assets 6.5

Interest directly attributable to the construction should likewise be capitalised.


Dr Land & Buildings 1.2
Cr Finance costs 1.2

Page 16
The debentures should be accounted for under amortised cost using the effective interest rate method. The
Working (v)

carrying value is calculated as follows:

Net proceeds on issue (initial fair value) 40.0


Finance cost for year ended 31 March 2015 (at 8.5%) 3.4
Coupon interest due (7% * 40) (current liability) (2.8)
Closing carrying amount (non-current liability) 40.6

Adjust debenture carrying amount and recognise interest:

Dr Profit or loss – finance costs 3.4


Cr Interest liability 2.8
Cr Debentures 0.6

Accrue for corporation tax due:


Working (vi)

Dr Profit or loss - taxation 0.5


Cr Taxation due 0.5

Equity dividend due on 90 million shares * €0.06 per share. AS the proposal was made before the reporting
Working (vii)

date a liability is recorded. Total amount due €5.4 million

Equity dividend accrued:


Dr Retained earnings 5.4
Cr Equity dividends payable 5.4

Page 17
Marking scheme:
SOLUTION 3

8 parts * 2.5 mark each 20

[Total: 20 Marks]

Suggested solution:

Part 1: Answer (c)

IAS 1 gives detailed requirements with respect to the contents of each statement, but does not provide
prescriptive formats.

Part 2: Answer (a)

If an error existed in the past period, and the financial statements were incorrect as a result of this
error, the correction must be made retrospectively. An error is a material misstatement which resulted
from information which was available, or could reasonably have been available, to the preparers of the
financial statements at the time of preparation. Hindsight is not evidence of errors.

Part 3: Answer (d)

An amount of €8 million was overprovided for in the previous year. Hence the provision for the current
year should be reduced by that amount. Hence an expected liability of €49 million requires a provision
of €41 million. The liability is still €49 million as this is the amount expected to be paid. Basically, the
provision moves from the existing figure of €8 million credit to the required level of €49 million credit.

Part 4: Answer (d)

The goods do not satisfy the IAS 18 requirements for recognition of revenue. IT is not probable that the
economic benefit associated with the sale will flow to the entity. Neither is there sufficient evidence that
the risk and reward associated with the goods have transferred to the customer.

As the goods are not considered sold, they must be considered inventory of Gerry plc. Inventory is
carried at the lower of cost and net realisable value.

Part 5: Answer (d)

There are three conditions necessary in order for a provision to be recognised. These are: (1) present
obligation, (2) probable outflow of economic benefit as a result, and (3) a reliable estimate of the amount.

Item (d) fails the first test. The expectation of a major repair is not an obligation. All other examples are
obligations.

€m
Part 6: Answer (c)

Opening trade receivables 30


Revenue 90
Receivables sold (3)
Receivables acquired 5
Decrease in trade receivables due to settlement discounts (1)
Cash received (balancing figure) (79)
Closing trade receivables 42

Page 18
Part 7: Answer (b)

IFRS 5 requires that in order to be classified as “held for sale”, an asset must be available for immediate
sale in its present condition, and that the sale be highly probable. IFRS 5 goes on to say that in order
for a sale to be recognised as highly probable there are certain conditions that must be met. One of
these is that the asset must be expected to qualify as a completed sale within 12 months. However this
is NOT a requirement that the sale must actually occur within 12 months. Merely that the expectation
at the date of classification is that this will be the case.

Part 8: Answer (c)

Option (b) is incorrect. Each of the other options is individually correct. Answer (c) is the most correct
option.

Page 19
Marking scheme:
SOLUTION 4

Explanation of any four terms at 1 mark each 4


Subtotal
(a)
4

Calculation of total finance cost 3


Allocation under the straight line method 2
(b)

Allocation under the effective interest rate method 5


Subtotal 10

Demonstration of understanding of why effective interest rate method is superior 6


Subtotal
(c)
6

[Total: 20 Marks]

Suggested solution

Finance Costs are all costs associated with servicing a liability. The term includes interest (whether paid
annually or rolled up to be paid at the maturity date). Any issue costs, discounts or premia arising on issue
(a)

or redemption, or any other costs associated with honouring the terms of the liability are included as finance
costs.

A Finance Lease is a lease that transfers to the lessee the majority of significant risks and rewards associated
with an asset. Features of a lease that support it being classified as a finance lease include any of the
following:

• The present value of the lease payments amounts to substantially all (>90%) of the fair value of the
asset at inception of the lease;
• The lease term is a substantial portion of the useful economic life of the asset;
• The leased asset is so specialised as to be of limited use to other parties;

Amortised cost is the name given to the method by which finance costs associated with a financial instruments
are allocated to accounting periods at a constant effective annual interest rate of return. This method is
deemed appropriate when a financial instrument’s cash flows consist of interest and principal amounts, and
the entity plans to hold the instrument until its maturity.

Straight line refers to a method of allocating costs or income that charges or credits each accounting period
with equal amounts proportional to the passage of time.

Sum of the Digits is a method of allocating cost or income to various accounting periods. It is designed to
approximate the effective interest rate method, but is less accurate. It only works with an amortising loan,
where principal and interest is being repaid. It was popular in the days before spreadsheeds were popular as
the effective intereest rate calculation could be lengthy and tedious if performed manually. It involves adding
together the sum of the number of years a cash flow is expected to occur, and allocating a declining portion
of the total cash flow to each accounting period. For example, if the cash flow was to accrue over a three year
period, the sum of the digits was 3+2+1=6. Year 1 would be allocated 3/6 of the total cash flow, year 2, 2/6
and year 3, 1/6. Hence over the three years the entire cash flow would be allocated.

(b) Total finance costs associated with the bond are as follows:

• Coupon interest is 5% * €100m * 4 years = €20 million


• Discount on issue = €4 million
• Issue costs = €2 million
• Premium on redemption = €100m * 6% = €6 million
• Total finance costs = €32 million

Page 20
Under the straight line method each period would be allocated ¼ of the total, or €8 million per year in finance
cost.

Under the effective interest rate method, the calculation would be as follows:

Year Opening balance Finance cost Payment Closing balance


€m €m €m €m €m
1 94.0 7.657 (5.0) 96.657
2 96.657 7.874 (5.0) 99.531
3 99.531 8.108 (5.0) 102.639
4 102.639 8.361 (5.0) 106.0

Hence, the amount of finance cost allocated to each accounting preiod is as follows:

• Year 1 would be allocated €7.657 million;


• Year 2 would be allocated €7.874 million;
• Year 3 would be allocated €8.108 million;
• Year 4 would be allocated €8.361 million.

The effective interest rate method is superior to the others as it takes full account of any cash flows arising
during the life of the financial instrument. These may be irregular, frontloaded or even. The method allocates
(c)

the total finance cost in direct proportion to the amount outstanding and the length of time it is outstanding.

1. The opening balance is always the net cash received (in the case of a liability) or paid (in the case of an
Tutorial notes:

asset acquired). Here this is the discounted proceeds (€96m) less issue costs (€2m).

2. The finance cost is always the opening balance times the effective rate.

3. Any payment is decided by the terms of the instrument. Here it is 5% of the par value each year.

4. The closing balance is the opening amount plus any unpaid finance cost.

5. The total finance cost must equal the €32 million originally calculated. The method just determines the amount
allocated to each period.

6. The closing balance should equal the amount due on maturity. Here the maturity is at a 6% premium, hence
€100m + 6m = €106m is payable on maturity.

Page 21
Marking scheme:
SOLUTION 5

Explanation and treatment of remeasurement gains / losses for PPE 4


Explanation and treatment of remeasurement gains / losses for Investment Property 2
(a)

Explanation and treatment of remeasurement gains / losses for Financial Assets 4


Subtotal 10

Calculation of carrying value at 1 April 2014 1


(b)

Explanation and treatment of revaluation at 1 April 2014 (journal required) 2


(i)

Calculation of revaluation gain to 31 March 2015 1


Explanation and treatment of revaluation gain to 31 March 2015 (journal required) 1
Subtotal 5

Explanation and treatment of dividend received (journal required) 1


Explanation and treatment of purchase of investments (journal required) 1
(ii)

Explanation and treatment of disposal of investments (journal required) 2


Explanation and treatment of revaluation gain to 31 March 2015 (journal required) 1
Subtotal 5

[Total: 20 Marks]

Suggested solution

Under the revaluation model of IAS 16 revaluation gains and losses are treated differently depending on
(a)

whether they are originating or reversing.


(i)

An originating gain on revaluation of PPE (meaning one which is occurring for the first time, and not reversing
a previously recognised loss) is recognised through “Other Comprehensive Income (OCI)” in the SPLOCI. This
is then taken to a separate component of equity, usually called “Revaluation Surplus” reserve.

An originating loss on revaluation is taken to profit or loss as an expense.

A revaluation gain that is reversing a previously recognised loss is taken to profit or loss as a gain until the
effect of the previously recognised loss is completely reversed. This takes into account any difference in
depreciation charges arising as a result of the previous loss lowering the depreciable amount. Any gain over
and above the amount recognised in profit or loss is treated as an originating gain, and taken to OCI.

A revaluation loss that is reversing a previously recognised gain is taken to OCI until the effect of the
revaluation gain is reversed. This means in effect that OCI is charged with the expense until the accumulated
revaluation surplus remaining in equity has been eliminated. Any further loss is treated as an originating loss
and taken to profit or loss.

It should be noted that gains and losses on different assets may not be offset against each other. Any reversal
must be relating to revaluations of the same asset.

Under the fair value model of IAS 40, all gains or losses on investment property are taken to profit or loss and
on to Retained Earnings reserve. There is no revaluation surplus reserve where investment property is
(ii)

concerned. Likewise, there is no difference between originating and reversing gains and losses under IAS 40.

Under IFRS 9 financial assets may be held under the “fair value” or the “amortised cost” categories. The
categorization is not optional, but depends on the type of instrument and the entity’s business model for
(iii)

holding it. The “fair value” method is the default and applies to all financial instruments to which the “amortised
cost” method does not apply.

Page 22
Under IFRS 9, gains and losses on remeasurement of such assets are normally taken to profit or loss,
affecting the retained earnings reserve ultimately. However there is a limited exception to this. If the financial
asset in question is an equity investment, and an election has been made at the date of purchase, any gains
or losses on remeasurement are taken to OCI, and on to a separate component of equity. This election is
irrevocable once made, but may be applied or not as decided on the date of purchase.

This property was an IAS 16 property until 1 April 2014 and an IAS 40 investment property after this date. The
(b)

accounting treatment therefore changes on the date it became an investment property. Any revaluation gains
(i)

or losses up to that date are accounted for under IAS 16, and any arising since are accounted for under IAS
40.

The carrying value of the property at 1 April 2014 was as follows:


Land Building
€million € million
Cost 1.0 2.5
Depreciation to 31 March 2013 (3.5 – 1.0)/25 (0.1)
Depreciation to 31 March 2014 (same) (0.1)
Carrying value (before revaluation) 1.0 2.3

Fair value at 1 April 2014 1.9 2.2


Revaluation gain (loss) 0.9 (0.1)

The revaluation gain would be taken to OCI and the revaluation loss to profit or loss as they were recognised
in the financial year ended 31 March 2015. The depreciation relates to previous years, so its recording is not
the subject of the requirement.

Journal entry 1 April 2014: DR €m CR €m


Dr Accumulated depreciation 0.2
Dr Profit or loss 0.1
Cr Buildings 0.3
Dr Land 0.9
Cr OCI / Revaluation surplus 0.9

From 1 April 2014 the property is considered an investment property.

Journal entry 1 April 2014: DR €m CR €m


Dr Investment property 4.1
Cr Land 1.9
Cr Buildings 2.2

Under IAS 40, investment property is not depreciated and is revalued to fair value at each reporting date. Any
gains or losses are taken to profit or loss.
Investment property
€million
Fair value 1 April 2014 4.1
Fair value 31 March 2015 4.8
Fair value gain 0.7

Journal entry 31 March 2015: DR €m CR €m


Dr Investment property 0.7
Cr Profit or loss 0.7

Page 23
(ii) Dividends received are recognised as income regardless of the treatment of the financial assets.

Journal entry to record dividends received: DR €m CR €m


Dr Cash 0.75
Cr Profit or loss 0.75

Journal entry to record purchase of investments: DR €m CR €m


Dr Financial assets 1.6
Cr Cash 1.6

Remeasurements are treated in accordance with the policy of the entity. We must assume that the irrevocable
election required by IFRS 9 was made as this is the policy of Williamson Ltd.

Journal entry to record remeasurement and disposal: DR €m CR €m


Dr Financial assets (1.1 – 0.9) 0.2
Cr Other comprehensive income 0.2

Dr Cash 1.1
Cr Financial assets 1.1

The assets held at the period end must be remeasured to €14 million. These are already carried at €12.7
million (12.0 – 0.9 + 1.6). The original carrying value included €0.9 relating to the investments sold, so these
are no longer there. In addition, new assets costing €1.6 million were purchased.

The fair value of these remaining assets on 31 March 2015 was 14 million, hence a gain of €1.3 million (14
– 12.7) must be recognised.

Journal entry to record remeasurement at 31 March 2015: DR €m CR €m


Dr Financial assets 1.3
Cr Other comprehensive income 1.3

Page 24
CORPORATE REPORTING
PROFESSIONAL 1 EXAMINATION - AUGUST 2015

NOTES:
You are required to answer Questions 1, 2 and 3. You are also required to answer either Question 4 or 5.
Should you provide answers to both Questions 4 and 5, you must draw a clearly distinguishable line through
the answer not to be marked. Otherwise, only the first answer to hand for Question 4 or 5 will be marked.

Note: Students have optional use of the Extended Trial


Balance, which if used, must be included in the answer booklet.

Provided are pro-forma:

Statements of Profit or Loss and Other Comprehensive Income By Expense, Statements of Profit or Loss
and Other Comprehensive Income By Function, and Statements of Financial Position.

TIME ALLOWED:
3.5 hours, plus 10 minutes to read the paper.

INSTRUCTIONS:
During the reading time you may write notes on the examination paper, but you may not commence
writing in your answer book. Please read each Question carefully.

Marks for each question are shown. The pass mark required is 50% in total over the whole paper.

Start your answer to each question on a new page.

You are reminded to pay particular attention to your communication skills, and care must be taken
regarding the format and literacy of your solutions. The marking system will take into account the
content of your answers and the extent to which answers are supported with relevant legislation, case
law or examples, where appropriate.

List on the cover of each answer booklet, in the space provided, the number of each question
attempted.

NB: PLEASE ENSURE TO ENCLOSE YOUR ANSWER SHEET TO QUESTION 3 IN THE


ENVELOPE PROVIDED.

The Institute of Certified Public Accountants in Ireland, 17 Harcourt Street, Dublin 2.


THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND

CORPORATE REPORTING
PROFESSIONAL 1 EXAMINATION – AUgUST 2015
Time allowed: 3.5 hours, plus 10 minutes to read the paper.
You are required to answer Questions 1, 2 and 3. You are also required to answer either Question 4 or 5.
Should you provide answers to both Questions 4 and 5, you must draw a clearly distinguishable line through the
answer not to be marked. Otherwise, only the first answer to hand for Question 4 or 5 will be marked.
You are required to answer Questions 1, 2 and 3.
1. Adams plc (Adams) is a public limited company based in Ireland. It has shareholdings in two other companies,
Truman plc (Truman) and Carter plc (Carter). Statements of Financial Position are shown below for all three
companies as at 31 July 2015.

Statements of Financial Position as at 31 July 2015

Adams plc Truman plc Carter plc


€ million € million € million
Non-current assets:
Property, plant & equipment 500 145 100
Investments 300 48 5
800 193 105
Current assets:
Inventories 180 51 23
Trade receivables 64 24 13
Cash & bank 24 13 8
268 88 44

Total assets 1,068 281 149

Equity:
Equity share capital of €0.25 each 250 100 40
Share premium 200 80 20
Retained earnings 358 65 61
808 245 121
Non-current liabilities:
6% loan notes 100 --- ---

Current liabilities:
Trade payables 143 36 18
Dividends proposed 17 --- 10
Total liabilities 260 36 28

Total equity & liabilities 1,068 281 149

The following additional information may be relevant:

(i) Adams bought 300 million ordinary shares in Truman on 1 August 2013, when the retained earnings of Truman
were €44 million. The consideration was agreed at €220 million for these shares. €120 million of this was settled
in cash on the date of purchase, the balance being paid by means of a 6% loan note. This investment has been
correctly recorded at cost in the books of Adams, included under the heading “Investments”. The loan note
interest was paid during the year ended 31 July 2014, but no entry has been made to reflect the interest payable
in the current accounting period.
(ii) Adams bought a 40% holding in the ordinary shares of Carter on 1 August 2014, when the retained earnings
balance in Carter’s books stood at €52 million. The consideration consisted of an immediate cash payment of
€50 million. The directors of Adams negotiated the right to appoint 4 directors to Carter’s 12-person board as a
result of its investment.
(iii) The group accounting policy is to value any Non-Controlling Interests (NCI) at their proportionate share of
identifiable net assets at the acquisition date.

Page 1
(iv) On 1 August 2013, certain property held by Truman had a fair value €20 million in excess of its carrying value.
The buildings component of this property, comprising 75% of the total value, had a useful economic life remaining
of 10 years at the date of acquisition.
(v) During the financial year ended 31 July 2015, Truman had sold goods to Adams amounting to €60 million. The
purchase price included a mark-up of 20% on cost. Truman’s normal mark-up on goods sold is 60%. Of these
goods, one-quarter remained in the closing inventory of Adams at the reporting date.
(vi) Recorded in the books of Adams was an intra-group trade payable of €20 million owed to Truman at year-end.
However, the books of Truman showed a balance of €22 million owed by Adams. It transpired that Truman’s
computer system had automatically charged to Adams’ account interest of €2 million due to late payments. It was
subsequently agreed that Truman would waive this interest.
(vii) Adams has not accounted for any dividend receivable from its group companies. Both Adams and Carter have
proposed dividends as shown in current liabilities. Carter’s proposed dividend relates entirely to the post-
acquisition period. No other dividends were paid or proposed in the year.
(viii) goodwill was reviewed for impairment at the reporting date, and a €3 million impairment loss was considered
necessary to the goodwill of Truman. A €1 million impairment loss should be provided for on the investment in
Carter.
(ix) All workings may be rounded to the nearest €0.1m.

REQUIREMENT:

Prepare the Consolidated Statement of Financial Position for the Adams group as at 31 July 2015 in accordance
with International Financial Reporting Standards. (23 marks)
(a)

Format & Presentation (1 mark)

If you were a non-controlling shareholder in Truman, you might be concerned regarding certain implications of
the transactions described in notes (v) and (vi) above. Outline clearly the nature of and reasons for any concerns
(b)

a prudent shareholder might have.


(6 marks)

[Total: 30 MARKS]

Page 2
2. The following trial balance was extracted from the books of Zebedee plc (Zebedee), a construction company, on
31 July 2015.

Note Dr Cr

Revenue (ii) 1,041.6


€ million € million

Cost of sales 618.8


Distribution costs 128.8
Administration expenses 207.2
Interest paid (i) 11.2
Land (i) 42.0
Buildings (i) 131.6
Plant and equipment at cost (i) 168.0
Accumulated depreciation 1 August 2014 - plant and equipment (i) 56.0
Intangible assets at valuation (iii) 84.0
Financial assets at fair value 1 August 2014 (viii) 196.0
Inventory at 31 July 2015 50.4
Trade receivables 193.2
Cash and bank 78.4
Trade payables 78.4
Equity shares of €5 each (vi) 196.0
4% cumulative redeemable preference shares 2019 (vii) 56.0
Revaluation surplus (i) (iii) 112.0
Provision for warranty (iv) 42.0
10% Debenture (issued on 1 August 2014) 112.0
Corporation Tax (v) 14.0
Retained earnings reserve 1 August 2014 229.6
1,923.6 1,923.6

(i) Land and buildings consists of the fair valuation of buildings held at 1 August 2014 (valued at that date) plus €17
The following notes may be relevant, and where so, you are to consider all figures material:

million being the capitalised cost of new buildings constructed during the year. This amount includes materials
and labour incurred on the construction. Indirect overheads apportioned based on the labour cost of the
construction work amounted to €3.5 million. These have not been capitalised and are included in “administration
expenses”. A portion of the debentures has been used directly to fund the construction work. Interest on this
portion for the year amounted to €1.2 million. This is included within “interest paid”. The old buildings have a
useful economic life of 30 years as on 1 August 2014. The new building has a useful life of 50 years from its date
of completion, 31 July 2015. No depreciation has yet been charged for the year. Buildings are depreciated on a
straight line basis over their useful economic life.

Plant & equipment is depreciated at 25% reducing balance per annum.

All depreciation is charged to cost of sales.

(ii) Revenue includes €22 million in respect of goods sold to a customer on a consignment (sale-or-return) basis.
These were treated as normal sales in the books and included a 30% profit margin on selling price. However, the
customer has given no indication to date whether she plans to keep or return the goods.

(iii) During the year, the directors decided their brand was very valuable. They commissioned a professional firm to
measure its value. The advice of the professional firm was that the brand had a value of €30 million. Accordingly,
it was decided to recognise this in the books, and the directors credited “revaluation surplus” with the same
amount. No amortisation should be charged on intangible assets.

(iv) Zebedee offers a 12 month warranty on goods and services supplied. It is expected that, on average, 4% of such
goods or services will prove faulty. The average cost of rectifying flaws is 120% of sales prices.

(v) The corporation tax balance is the balancing amount on the taxation liability account after recording payment of
the liability for year ended 31 July 2014. The estimate for the current year’s liability is €3 million.

(vi) The directors of Zebedee have decided prior to the reporting date to propose an equity dividend of €0.40 per
equity share. All shares in issue rank fully for dividend.

Page 3
(vii) The preference shares were issued on 1 February 2015. The preference dividend for the year has not yet been
provided for. The directors wish to provide for this payment.

(viii) Financial assets consist of equity investments. An election has been made to recognise all remeasurement gains
or losses in “other comprehensive income” under IFRS 9 Financial Instruments. The fair value of these
investments at 31 July 2015 was €76 million. No acquisitions or disposals occurred during the year. Zebedee
uses revaluation surplus to accumulate gains and losses on these investments.

REQUIREMENT:

Prepare, in a form suitable for publication to the shareholders of Zebedee, the:

Statement of Profit or Loss and Other Comprehensive Income of Zebedee for the year to 31 July 2015;
(12 marks)
(a)

Format & Presentation (1 mark)

(b) Statement of Changes in Equity for year ended 31 July 2015; (5 marks)

Statement of Financial Position as at 31 July 2015. (11 marks)


Format & Presentation (1 mark)
(c)

[Total: 30 MARKS]

Notes to the financial statements are not required but all workings should be shown.

Page 4
3. The following multiple-choice question contains eight sections, each of which is followed by a choice of
answers. Only one answer is correct in each case. Each question carries equal marks. On the answer
sheet provided indicate for each question, which of the options you think is the correct answer. Marks
will not be awarded where you select more than one answer for any question.

Record your answer to each section in the answer sheet provided.


REQUIREMENT:

The following information applies to the grennan group plc for year ended 31 July 2015, and should be used to help
answer Questions 1 to 4 below:

Revenue €250 million


gross margin 20%
Net margin (based on profit before interest and tax) 8%
Inventory turnover per annum 14 times
Return on capital employed (based on profit before interest and tax) 12%

1. Based on the above information, what is the most reasonable estimate for the net amount of operating expenses
incurred for the year?

(a) €20 million


(b) €30 million
(c) €50 million
(d) Impossible to estimate from the available data.

2. If the financial statements on which the above figures are based were subsequently altered to increase the tax
charge for the year, what would be the most likely effect on the “return on capital employed” ratio?

(a) It would decrease


(b) It would not change
(c) It would increase
(d) Impossible to estimate from the available data.

3. What is the average number of days for which inventory is held (to the nearest whole day)?

(a) 14 days
(b) 18 days
(c) 26 days
(d) Impossible to estimate from the available data.

4. What is the asset turnover ratio for the company?

(a) 67%
(b) 96%
(c) 150%
(d) Impossible to estimate from the available data.

5. The Financial Reporting Council (FRC) has recently issued FRS 100, FRS 101 and FRS 102.

FRS 100 to 102 apply to the following entities:


(i) Non-publicly quoted for-profit entities
(ii) Publicly quoted entities
(iii) Not-for-profit entities
(iv) Any entity that chooses to use them.

Regarding the above statements, which of the following options is correct?

(a) (iv)
(b) (i) and (ii)
(c) (ii) and (iii)
(d) (i) and (iii).

Page 5
6. Liam plc has 100 units of raw material in inventory at 31 July 2015. These cost a total of €30,000. Since
purchasing the material, the purchase price has dropped to €19,000. However the material will be incorporated
into a final product which is expected to sell for €75,000 after further conversion costs of €25,000 are incurred.

At what amount should the inventory be carried in the financial statements for year ended 31 July 2015?

(a) €19,000
(b) €20,000
(c) €30,000
(d) €50,000.

7. Allingham plc reported profit before taxation of €45 million for the year ended 31 July 2015. The tax charge on
profit was €8 million, and other comprehensive income totalled €5 million. If there were 30 million equity shares
in issue for the year how much should be reported as basic earnings per share?

(a) €1.23
(b) €1.40
(c) €1.50
(d) €1.67.

8. IFRS 8 requires an entity to disclose segmental information for certain sections of the business designated
“reportable segments”. Which of the following statements is NOT TRUE when it comes to defining reportable
segments?

(a) There are three quantitative tests: revenue, assets and profit. In order to be a reportable segment, all three
of these must be met.
(b) Reportable segments must account in total for at least 75% of revenue. If not, further segments must be
identified until this is the case.
(c) Any segment deemed important by the entity may be deemed a reportable segment even if it does not
meet other criteria;
(d) For a segment to be reportable, separately reported information must be available internally to the chief
operating decision maker.

[Total: 20 MARKS]

Answer either Question 4 or Question 5


The IASB’s Conceptual Framework for Financial Reporting attempts to set out the concepts that underlie the
preparation and presentation of financial statements for external users. The most recent version was issued in
4.
September 2010.

REQUIREMENT:

Discuss the purpose and status of the Conceptual Framework. In particular, you should cover the aims of the
framework and its status in the event of a conflict between it and a particular standard. (10 marks)
(a)

(b) Outline the advantages and disadvantages of having a statement such as the Conceptual Framework.

(10 marks)

[Total: 20 MARKS]

OR

Page 6
5.
IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors lays down criteria for the selection of
accounting policies and prescribes circumstances in which an entity may change an accounting policy. The
(a)

standard also deals with accounting treatment of changes in accounting policies, changes in accounting
estimates and correction of prior period errors.

REQUIREMENT:

(i) Define an accounting policy according to IAS 8. Explain briefly the difference between an accounting policy and
an accounting estimate. (4 marks)

(ii) Outline the accounting treatment required to record (1) a change in accounting policy, (2) a change in accounting
estimate and (3) the correction of an error. (6 marks)

The following are summaries of the draft financial statements of Sigma plc for financial year ended 31 July 2015
together with the comparative figures for 2014. During August 2015, prior to the signing off of the financial
(b)

statements, it was discovered that a fraud had been taking place in the company for the previous three years.
The chief financial officer had been misappropriating monies paid to the company by its customers, the amounts
instead appearing as receivables. The effect of the fraud was that amounts shown in the financial statements as
receivables need to be written off as they were in fact paid. There is no prospect of recovering the money as the
employee lost it gambling and is now bankrupt. The amounts were as follows for each period ending on the
following dates:

31 July 2013: €14,000


31 July 2014: €16,000
31 July 2015: €20,000.

Statements of Profit or Loss and Other Comprehensive Income for year ended 31 July:
2015 2014
€’000 €’000
Revenue 300 275
Cost of Sales (225) (212)
gross Profit 75 63
Expenses (30) (26)
Profit for year 45 37

Statements of Changes in Equity (Retained Earnings only) for year ended 31 July:
2015 2014
€’000 €’000
Balance 1 August 258 236
Profit for the year 45 37
Dividends declared (16) (15)
Balance 31 July 287 258

Statements of Financial Position as at 31 July:


2015 2014
€’000 €’000
Non-current Assets 294 306
Net Current Assets 143 102
437 408
Equity Share Capital 150 150
Retained Earnings 287 258
437 408
REQUIREMENT:

Restate the above financial statements, including comparatives, incorporating the adjustments you deem necessary as
a result of the fraud. Ignore the effect of taxation. Disclosure notes are not required.
(10 marks)

[Total: 20 MARKS]
END OF PAPER
Page 7
SUGGESTED SOLUTIONS

THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND

CORPORATE REPORTING
PROFESSIONAL 1 EXAMINATION – AUgUST 2015

SOLUTION 1

Marking Scheme:

Basic consolidation (100% Adams + 100% Truman) 3


goodwill and impairment thereof (including NCI at acquisition date) 3
(a)

Recording of interest on loan note 2


Investment in associate calculation and impairment 2
Fair value adjustments and post acq movements 2
Intra group sales of inventory 2
Intra group balances outstanding & elimination of interest charged 3
Dividend receivable from associate 1
Reserves calculation and consolidation 3
NCI calculation at reporting date 2
Presentation 1
Subtotal 24

Problem of parent enforcing its control at cost to NCI – minority infringement? 2


Taking goods at lower than standard mark-up costs NCI and benefits parent 2
(b)

Waiver of interest again suggests that parent is forcing advantage to itself. 2


6

[Total: 30 Marks]

Page 8
Suggested Solution

Adams owns 300m shares out of 400m in Truman. This gives 75% ownership in Truman for 2 full years
(a) Group structure:

therefore Truman is a subsidiary.

Adams has 40% ownership in Carter for the full year and can appoint directors, hence significant influence
is exerted. Therefore Carter is an associate.

Consolidated Statement of Financial Position of Adams group plc as at 31 July 2015


€ million
Non current assets: [Plan = 100% Adams + 100% Truman]
Property, plant and equipment (500 +145 +17 (W5)) 662.0
goodwill (W1) 34.0
Investment in Associate (W4) 52.6
Other investments (300 -220 -50 +48) 78.0
826.6
Current assets:
Inventories (180 +51 -2.5 (W6)) 228.5
Trade receivables (64 +24 -2 (W7) -20 (W7)) 66.0
Dividend receivable from Associate (W8) 4.0
Cash & bank (24 +13) 37.0
335.5

Total assets 1,162.1

Equity:
Equity shares 250.0
Share premium 200.0
Retained earnings (W2) 365.7
815.7
Non-controlling interest (W3) 64.4
880.1

Non-current liabilities:
6% loan note 100.0

Current liabilities:
Trade payables (143 +36 -20 (W7)) 159.0
Interest due on 6% loan notes (W1) 6.0
Dividends proposed (17) 17.0
282.0
Total equity & liabilities 1,162.1

Page 9
W1 Calculation of goodwill on acquisition of Truman € million

Consideration
Loan notes 100
Cash 120
220
Value of NCI (25% * 244) 61
FV of net assets acquired
Equity share capital 100
Share premium 80
Pre-acquisition reserves 44
FVA – Property (W5-note iv) 20 (244)

goodwill 37

Impairment loss (note (viii)) (3)

Balance 34

(1) goodwill impairment is charged entirely to group retained earnings as is appropriate for the method used
Note:

(proportion of identifiable net assets).

(2) Interest for the year needs to be provided for (€100m * 6%):

Dr Retained earnings reserve €6m


Cr Current liabilities €6m

W2 Group retained earnings at 31 July 2015 Adams Truman


€ million € million
Balance per SOFP (total at y/e) 358 65
Less balance at acquisition (note (i)) (44)
Interest due on 6% loan notes (W1) (6)
Movement on FVA (buildings) (W5) (3)
URP in inventory re intra-group sale of goods to Adams (W6) (2.5)
Elimination of interest charged to Adams (W7) (2.0)
Dividend receivable from Associate (W8) 4.0
goodwill impairment re Subsidiary (W1) (3.0) ____
Adjusted reserves for consolidation 353.0 13.5
Consolidate Truman (75% * 13.5) 10.1
Share of retained earnings of associate (40% * (61-52)) 3.6
Impairment loss on investment in associate (1.0)
group total 365.7

W3 Non-controlling interest at 31 July 2015 Truman


€ million
Balance at acquisition (proportional value from W1) 61
Share of post-acquisition reserves from W2 (25% * 13.5) 3.4
Total 64.4

W4 Investment in Associate Carter


€ million
Balance at acquisition (proportional value from W1) 50
Share of post-acquisition reserves from 40%*(61 -52) 3.6
Impairment loss (1)
Total 52.6

Page 10
W5 Fair value adjustments (note (iv)):

Property Carter €20m (€3m)** €17m


At acquisition Movement At rep. date

**Movement = depreciation of the adjustment to the buildings component only for 2 full years since acquisition:
€20m * 75% / 10 yrs * 2 yrs = €3m. This is charged to the earnings of the company which holds (and therefore
depreciates) the asset, namely Carter. Hence:

Dr PPE €17.0m
Dr Retained earnings – Carter €3.0m
Cr goodwill (FV net assets) €20.0m

Unrealised profit (URP) on goods held in closing inventory:


W6 Intra-group trading of goods

(€60m * 20/120) * 1/4 (sold by Truman therefore NCI IS affected) €2.5m


Adjustment to reduce reserves (Truman) and Inventory:
Dr Retained Earnings (Truman) €2.5m
Cr Inventory €2.5m

Eliminate interest €2m:


W7 Intra-group balance outstanding & interest charged – Adams & Truman

Dr Retained earnings (Truman) €2.0m


Cr Trade receivables (Truman) €2.0m

Following the above adjustment, the intra group receivables and payables now balance at €20.0m. Hence
we must cancel those balances.

Dr Trade payables €20.0m


Cr Trade receivables €20.0m

Carter’s proposed dividend €10m


W8 Dividends

Amount payable to parent company (40%) €4m

Adjustment to show dividend receivable by Adams and increase retained earnings (Adams).

Dr Dividends receivable €4.0m


Cr Retained earnings (Adams) €4.0m

Any time a shareholder is in a minority situation on the share register, he/she should be alert for any sign that
the majority holder(s) is (are) abusing their power, or colluding with each other to gain advantage at the
(b)

expense of the minority shareholders.

Here, in note (v), there is a strong indication that Adams, the controlling shareholder, is buying goods from
Truman at an unusually low price. The mark-up on sales to Adams is just one third of normal. The amount of
lost profit on €60 million worth of trading in the year to July 2015 was €20 million (60m * 100/120 * (60%-
20%)). Now this may be legitimate in that any customer buying those volumes may receive a discount of that
magnitude. However it would cause me serious concern as a minority shareholder. I would fear that Adams
may be abusing its controlling stake to reduce the price it pays my company for goods.

In note (vi) it is suggested that Adams may be slow in paying its debts to Truman, triggering an automatic
accrual of interest. The fact that this was waived again suggests Adams exerted its influence as a controlling
shareholder. I would be interested in learning the circumstances of such waiver.

In both cases, I would be interested in finding out whether there is anyone looking out for the interests of the
minority shareholders. Non-executive directors would be a minimum recommendation, and I would prefer to
have direct representation on the board of Truman.

Page 11
SOLUTION 2

Marking Scheme:

Statement of profit or loss and other comprehensive income


Transfer of figures from trial balance to appropriate headings 2
(a)

Capitalisation of overheads into buildings cost and exclusion from admin exp. 1
Capitalisation of interest into buildings cost and exclusion from finance costs 1
Depreciation on buildings (calculation and inclusion in expenses) 1
Depreciation on plant & equipment 1
Exclusion of sale or return goods from revenue 1
Inclusion of sale or return goods in closing inventory at cost price 1
Adjustment to admin expenses re warranty provision 1
Tax (calculation and recognition in P/L) 1
Preference dividend (calculation and inclusion in finance costs) 1
Presentation of gain on remeasurement of equity investments within OCI 1
Presentation 1
Subtotal 13

Statement of Changes in Equity


Transfer of figures from trial balance to appropriate headings 1
(b)

Eliminate recognition of brand from revaluation surplus 1


Transfer of SPLOCI figures to correct equity account 2
Calculation of dividend proposed and deduction from retained earnings 1
Subtotal 5

Statement of Financial Position


Transfer of figures from trial balance to appropriate headings 2
(c)

Correct capitalised amount for new building 1


Depreciation of plant & equipment 1
Depreciation of buildings 1
Elimination of sale or return goods from trade receivables 1
Inclusion of sale or return goods in inventory at cost 1
gain on equity investments (calculation and recognition in NCA) 1
Transfer of figures from SOCIE to reserves 1
Equity dividends proposed (calculation and inclusion in liabilities) 1
Tax (recognition as liability net of existing balance) 1
Preference dividends (calculation and recognition as liability) 1
Warranty provision (calculation and inclusion of correct amount in liabilities) 1
Presentation 1
Subtotal 14 - Max 12

Suggested Solution

(a) Zebedee plc:


Statement of Profit or Loss and Other Comprehensive Income for year ended 31 July 2015
€ million
Revenue (1,041.6 - 22 (note (ii)) 1,019.6
Cost of Sales (618.8 – 15.4 (ii) + 3.8 (i) + 28 (i)) (635.2)
gross profit 384.4
Distribution costs (128.8) (128.8)
Administration expenses (207.2 – 3.5 (i) + 6.9 (iv) (210.6)
Finance costs (11.2 – 1.2 (i) +1.1 (vii) (11.1)
Profit before tax 33.9
Tax (vi) (17.0)
Profit for the year 16.9

Other comprehensive income: Items that will not be reclassified to profit or loss
Loss on revaluation of investments (viii) (120.0)
Total comprehensive income for the year (103.1)
Page 12
(b) Zebedee plc Statement of Changes in Equity for year ended 31 July 2015
Share Revaluation Retained Total
Capital Surplus Earnings Equity
€million €million €million €million
Balance 1 August 2014 196.0 112.0 229.6 537.6
Derecognition of brand name (iii) (30.0) (30.0)
Total comprehensive income (120.0) 16.9 (103.1)
Dividends declared (vi) (15.7) (15.7)
Balance 31 July 2015 196.0 (38.0) 230.8 388.8

(c) Zebedee plc Statement of Financial Position as at 31 July 2015 € million

Land & buildings, (42 + 131.6 +3.5 (i) + 1.2(i) -3.8(i) 174.5
Non-current assets:

Plant & equipment (168 – 56 – 28 (i) 84.0


Intangible asset (84 – 30 (iii) 54.0
Financial assets (196 - 120 (viii)) 76.0
388.5
Current assets:
Inventory (50.4 +15.4 (ii) 65.8
Trade receivables (193.2 -22 (ii) 171.2
Cash & bank (78.4) 78.4
315.4
Total assets: 703.9

Equity share capital 196.0


Equity:

Revaluation surplus (b) (38.0)


Retained earnings (b) 230.8
388.8

4% cumulative redeemable preference shares 56.0


Non-current liabilities:

10% debenture (112) 112.0


168.0

Trade payables (78.4) 78.4


Current liabilities:

Provision for warranty claim (42 + 6.9 (iv) 48.9


Corporation tax due (-14 + 17 (v)) 3.0
Preference dividend accrued (vii) 1.1
Equity dividend due (vi) 15.7
147.1
Total equity & liabilities 703.9

Working (i) / note (i)


Labour and overheads directly attributable to the construction of new PPE should be capitalised.

DR € million CR € million
Dr Land & Buildings 3.5
Cr Administration expenses 3.5

Interest directly attributable to the construction should likewise be capitalised.

DR € million CR € million
Dr Land & Buildings 1.2
Cr Finance costs 1.2

Page 13
Old buildings amounting to €114.6 million (131.6 – 17) need to be depreciated over 30 years. Charge €3.8
million to cost of sales.
DR € million CR € million
Dr Cost of sales 3.8
Cr Accumulated depreciation – buildings 3.8

The new building is not depreciated as it is only ready to be brought into use on 31 July 2015.
Depreciation of plant & equipment amounting to €28 million [(168 - 56) * 25%] is charged to cost of sales.

DR € million CR € million
Dr Cost of sales 28.0
Cr Accumulated depreciation – plant & equipment 28.0

Working (ii)
goods sold on sale or return do not meet the IAS 18 requirement that the risk associated with the goods has
been transferred to the new owner. Also, it is not yet probable that the economic benefit associated with
earning revenue will flow to the seller. Hence we must reduce revenue and trade receivables by €22 million.
The goods must be included in closing inventory at their cost price (€22 million * 70% - €15.4 million).

Reduce revenue and trade receivables:


DR € million CR € million
Dr Revenue 22.0
Cr Trade receivables 22.0

Include goods at cost in closing inventory:


DR € million CR € million
Dr Inventory 15.4
Cr Cost of sales 15.4

Working (iii)
According to IAS 38, internally generated intangibles may not be recognised in the financial statements as
an asset unless there is an active market in identical assets. It is clear that a brand is unique, and therefore
cannot form part of a population of identical assets. The existence of an estimate of fair value does not
constitute sufficiently strong evidence of valuation.

Eliminate €30 million from intangible assets and revaluation reserve:


DR € million CR € million
Dr Revaluation reserve 30.0
Cr Intangible assets 30.0

Working (iv)
Under IAS 37 a provision should be made as it is probable that an outflow of economic benefits will occur in
aggregate. The best estimate of the cost of honouring the warranty is 120% of the selling price of 4% of our
revenue for the last 12 months. This cannot include the goods on sale or return as we have entered into no
contract for warranty in respect of these goods, hence there is no present obligation. As there is an existing
provision in place, only the increase or decrease remains to be recorded.

Required provision: (1041.6 – 22) * 4% * 120% 48.94


Existing provision (42.0)
Increase required 6.94

Record increase in provision for warranty:


DR € million CR € million
Dr Administration expenses 6.9
Cr Provision for warranty 6.9

Page 14
Working (v)
The existing balance is €14 million debit. The required provision is €3 million credit. Hence the total
movement, and charge to profit or loss, is €17 million.

Adjust taxation provision:


DR € million CR € million
Dr Profit or loss - taxation 17.0
Cr Taxation liability 17.0

Working (vi)
There are 39.2 million equity shares in issue (€196 million / €5 each). Hence the total dividend payable is
39.2 million * €0.40 = €15.68 million. As the proposal to pay this was made prior to the reporting date, a
liability is recognised. As it is a transaction with owners, it is not an expense in the SPLOCI. It appears in the
statement of changes in equity.

Accrue for equity dividend payable: DR € million CR € million


Dr Retained earnings 15.7
Cr Equity dividends payable 15.7

Working (vii)
The preference shares were issued on 1 February 2015. Therefore 6 months dividend should be accrued.
€56m * 4% * 6/12 = €1.12 million. As the preference shares are cumulative, they are classified as liabilities
under IAS 32. Therefore the dividend is charged to finance costs within profit or loss and recognised as a
liability. Also, the shares are themselves classified as non-current liabilities for the same reason.

Preference dividend accrued: DR € million CR € million


Dr Finance costs 1.1
Cr Preference dividends payable 1.1

Working (viii)
A loss of €120 million is recognised. As the election was made to recognise such gains and losses as “other
comprehensive income”, it is so classified. It is included within revaluation surplus, and deducted from financial
assets.

Remeasurement loss on financial assets: DR € million CR € million


Dr OCI / revaluation surplus 120.0
Cr Financial assets 120.0

Page 15
Each correct mark gains 2.5 marks. No partial marks are awarded. Workings are not marked.
SOLUTION 3

1 Answer (b)
gross margin of 20% implies gross profit is €50 million. Net margin of 8% implies profit before interest and
taxation is €20 million. The difference most likely consists of net operating expenses.

2. Answer (c)
ROCE is calculated by dividing profit before interest and tax (PBIT) by total capital employed (equity plus debt).
Increasing the taxation charge will have no impact on PBIT, but will reduce capital employed (as the retained
earnings, and therefore the equity figure will be reduced). Therefore, the result will be higher as a percentage
of capital employed.

3. Answer (c)
Inventory days is the reciprocal of the inventory turnover ratio. A turnover of 14 times implies an average
holding period of 365 / 14 or 26 days.

4. Answer (c)
ROCE is the product of the net margin and asset turnover ratios. As we know two of these, it is easy to work
out the third. 12% = 8% * 150%.

5. Answer (d)
Publicly quoted entities must use IFRS, hence cannot choose to use FRS 100-102. Therefore answers (a),
(b) and (c) are incorrect.

6. Answer (c)
IAS 2 Inventory requires that inventory items be carried at the lower of cost or net realisable value (NRV). If
an item will be incorporated into a further product, the NRV of this product may be used instead of the NRV
of the individual inventory item.

Here, the cost of the raw material is €30,000. The NRV of the raw material is €19,000. However the NRV of
the completed product in its current state is €75,000 – 25,000 = €50,000. This is in excess of its cost, hence
the appropriate accounting value for the raw material is its cost, €30,000.

7. Answer (a)
Under IAS 33 Earnings per Share, basic earnings per share (EPS) is calculated as profit for the period. This
is by definition after taxation and before other comprehensive income.

Hence EPS is (45 – 8) / 30 or €1.23

8. Answer (a)
Meeting any one of the three quantitative tests mentioned is sufficient in order for a segment to be considered
reportable. Hence answer (a) is the untrue statement. Each of the other statements is true under IFRS 8
Operating Segments.

Page 16
SOLUTION 4
Marking Scheme:

Purpose & aims of conceptual framework (3 points plus discussion / explanation) 6


Status of conceptual framework (3 relevant points at 1 mark each) 4
(a)

Subtotal 10

At least 5 advantages and disadvantages mentioned and discussed in sufficient depth to demonstrate
understanding (2 marks per point made and discussed). 10
(b)

Subtotal 10
Total 20

Suggested Solution:

Purpose & Aims of the Conceptual Framework


The Conceptual Framework was designed to set out fundamental concepts that underlie the preparation and
(a)

presentation of financial statements. The following represent some of the core reasons for the development
of the framework:

• To assist the IASB in developing and amending standards. Without a framework such as this, standards
have been developed in an ad-hoc manner. This has not always resulted in top quality standards that
are consistent with each other.
• To reduce the number of alternative accounting treatments permitted by IFRS. A feature of older
standards has been the development of a “recommended” treatment and an “allowed alternative”. This
may have been for political reasons, such as to avoid conflicts with national laws, or to encourage
acceptance of the standards by a wider constituency. However it led to weaker standards, and
inconsistency in application.
• To assist other standard setters in developing standards. Not all national standard setters have the
resources or expertise to ensure theoretically sound standards. The existence of a generally accepted
high-quality framework provides support to these and similar bodies.
• To provide guidance to preparers and auditors in applying and assessing application of IFRS, especially
in “grey” areas where the guidance in IFRS is absent or ambiguous.
• To assist users of financial statements interpret information presented.

Status of Conceptual Framework


• The Conceptual Framework in not an IFRS, and does not seek to provide guidance on any specific
accounting transaction.
• The Framework is meant to set out high-level principles which seek to guide and inform the application
of the standards. The standards are effectively more detailed applications of the principles in the
Framework.
• It is recognised that the Framework is much younger than many standards and that there may be
contradictions between it and some standards. The Framework does not overrule any IFRS. If there is
a conflict, the IFRS prevails.
• It is anticipated that as the Framework and IFRS evolves, the number of conflicts will decline.
(10 marks)

• It brings a measure of consistency to the development of new standards.


(b) Advantages:

• Standards are more likely to be developed based on conceptual merits rather than on the basis of
economic consequences.
• It prevents arguments over the same conceptual points recurring as each standard is being developed.
• It provides support for objective standard setters against those who would seek to influence standards
to suit sectional or vested interests.
• It is likely that global adoption of IFRS would be higher due to higher quality and more consistent
standards.
• It makes it easy to highlight anomalies and inconsistencies in standard setting.

Page 17
• It can be difficult to develop a set of principles that are applicable fairly to every situation.
Disadvantages:

• Different parts of the world with different economic and cultural norms may need different principles. This
may serve to limit the global adoption of IFRS.
• Economic consequences of accounting standards may be ignored.
• The principles in the framework are by necessity general and subject to interpretation.
• Many areas of accounting that could benefit from general principles are not covered in the Conceptual
Framework. An example is the recognition of gains or losses through profit or loss or other
comprehensive income, which is somewhat arbitrary at present.
(10 marks)

[Total: 20 MARKS]

Page 18
SOLUTION 5

Definition of an Accounting Policy:


(a)

Accounting policies are the specific principles, bases, conventions, rules and practices applied by an entity
(i)

in preparing and presenting financial statements.

When an IAS/ IFRS (or an Interpretation) specifically applies to a transaction, other event or condition, the
accounting policy or policies applied to that item shall be determined by applying the Standard or Interpretation
and considering any relevant Implementation guidance issued by the IASB for the Standard or Interpretation.

An entity shall select and apply its accounting policies consistently for similar transactions, other events and
conditions, unless a Standard or an Interpretation specifically requires or permits otherwise.

The use of reasonable estimates is an essential part of the preparation of financial statements and does not
undermine their reliability. Examples include: Bad debts, inventory obsolescence, fair values of assets, useful
lives of assets, warranty obligations. A change in accounting estimate is an adjustment of the carrying amount
of an asset or a liability, or the amount of the periodic consumption of an asset, that results from the
assessment of the present status of, and expected future benefits and obligations associated with, assets and
liabilities.
(4 marks)

Change of Accounting Policy:


An entity shall change an accounting policy only if the change:
(ii)

• Is required by a Standard or an Interpretation; or if it


• Results in the financial statements providing reliable and more relevant information about the effects
of transactions, other events or conditions on the entity’s financial position, financial performance or cash
flows.

An entity shall account for a change in accounting policy resulting from the initial application of a Standard or
an Interpretation in accordance with the specific transitional provisions, if any, in that Standard or
Interpretation. Where this does not apply, the entity shall apply the change retrospectively. This means that
the accounts must be altered so that they contain the numbers which would have been there had the new
policy always been in force. However, this will not apply if it is impracticable to determine either the period-
specific effects or the cumulative effect of the change. The initial application of a policy to revalue assets is
not dealt with in this manner.

Change of Accounting Estimate:


accordingly, are not corrections of errors. The effect of a change in an accounting estimate, shall be recognised
prospectively (i.e. from the date of the change onward) by including it in profit or loss in the period of the
change and future periods, if relevant.

Correction of Prior Period Errors :


Prior period errors are omissions from, and misstatements in, the entity’s financial statements for one or more
prior periods arising from a failure to use, or misuse of, reliable information that:

• Was available when financial statements for those periods were authorised for issue; and
• Could reasonably be expected to have been obtained and taken into account in the preparation and
presentation of those financial statements.

Examples of such errors include the effects of mathematical mistakes, mistakes in applying accounting
policies, oversights or misinterpretations of facts, and fraud.

Except to the extent that it is impracticable to determine either the period-specific effects or the cumulative
effect of the error, an entity shall correct material prior period errors retrospectively in the first set of financial
statements authorised for issue after their discovery. This means that the accounts must be altered so that
they contain the numbers which would have been there had the error never occurred. The following actions
must be taken:

Page 19
• Restate the comparative amounts for the prior period(s) presented in which the error occurred; or
• If the error occurred before the earliest prior period presented, restate the opening balances of assets,
liabilities and equity for the earliest prior period presented.
• Adjust the opening balance in the statement of changes in equity.

Omissions or misstatements of items are material if they could, individually or collectively, influence the
economic decisions of users taken on the basis of the financial statements.
(6 marks)

The effect of the fraud existed in previous periods although the directors of Sigma plc were unaware of it.
Hence, the financial statements should be corrected retrospectively. As the current financial statements will
(b)

show one comparative year, both of these years will be restated. Any effect predating the earliest period
presented will be adjusted for through opening equity balances. The incremental effects of the fraud will be
reported through profit or loss each year, appearing as additional expenses. The cumulative effects will appear
in the Statement of Financial Position, through a reduction of the trade receivables and retained earnings
figures. The opening equity balances in the statement of changes in equity should show the original balance,
adjusted by the cumulative effect of the adjustment. This is so users can reconcile the figures with those
published the previous year.

Statements of Profit or Loss and Other Comprehensive Income for year ended 31 July:
2015 2014
€’000 €’000
Revenue 300 275
Cost of Sales (225) (212)
gross Profit 75 63
Expenses (50) (42)
Profit for year 25 21

Statements of Changes in Equity (Retained Earnings only) for year ended 31 July:
2015 2014
€’000 €’000
Balance 1 August 258 236
Prior period adjustment (30) (14)
Adjusted opening balance 228 222
Profit for the year 25 21
Dividends declared (16) (15)
Balance 31 July 237 228

Statements of Financial Position as at 31 July:


2015 2014
€’000 €’000
Non-current Assets 294 306
Current Assets 93 72
387 378
Equity Share Capital 150 150
Retained Earnings 237 228
387 378

(10 marks)

[Total: 20 Marks]

Page 20
CORPORATE REPORTING
PROFESSIONAL 1 EXAMINATION - APRIL 2016

NOTES:
You are required to answer Questions 1, 2 and 3. You are also required to answer either Question 4 or 5.
Should you provide answers to both Questions 4 and 5, you must draw a clearly distinguishable line through
the answer not to be marked. Otherwise, only the first answer to hand for Question 4 or 5 will be marked.

Note: You have optional use of the Extended Trial


Balance, which if used, must be included in the answer booklet.

Provided are pro-forma:

Statements of Profit or Loss and Other Comprehensive Income By Expense, Statements of Profit or Loss
and Other Comprehensive Income By Function, and Statements of Financial Position.

TIME ALLOWED:
3.5 hours, plus 10 minutes to read the paper.

INSTRUCTIONS:
During the reading time you may write notes on the examination paper, but you may not commence
writing in your answer book. Please read each Question carefully.

Marks for each question are shown. The pass mark required is 50% in total over the whole paper.

Start your answer to each question on a new page.

You are reminded to pay particular attention to your communication skills, and care must be taken
regarding the format and literacy of your solutions. The marking system will take into account the
content of your answers and the extent to which answers are supported with relevant legislation, case
law or examples, where appropriate.

List on the cover of each answer booklet, in the space provided, the number of each question
attempted.

NB: PLEASE ENSURE TO ENCLOSE YOUR ANSWER SHEET TO QUESTION 3 IN THE


ENVELOPE PROVIDED.

The Institute of Certified Public Accountants in Ireland, 17 Harcourt Street, Dublin 2.


THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND

CORPORATE REPORTING
PROFESSIONAL 1 EXAMINATION – APRIL 2016
Time allowed: 3.5 hours, plus 10 minutes to read the paper.
You are required to answer Questions 1, 2 and 3. You are also required to answer either Question 4 or 5.
Should you provide answers to both Questions 4 and 5, you must draw a clearly distinguishable line through the
answer not to be marked. Otherwise, only the first answer to hand for Question 4 or 5 will be marked.
You are required to answer Questions 1, 2 and 3.
1. Acoff Plc (Acoff) is a public limited company based in Ireland. It has shareholdings in two other companies,
Braggs Plc (Braggs) and Van Cleff Plc (Van Cleff). Van Cleff is based in Switzerland and uses the Swiss Franc
(CHF) as its functional currency. Statements of financial position are shown below for all three companies as at
31 March 2016.
Statements of Financial Position as at 31 March 2016

Acoff Plc Braggs Plc Van Cleff Plc


€ million € million
Non-current assets
CHF million

Property, plant & equipment 750 223 80


Investments (including group companies) 460 76
1,210 299 80
Current assets
Inventories 310 42 13
Trade receivables 122 75 17
Cash & bank 64 15 8
496 132 38

Total assets 1,706 431 118

Equity
Equity share capital of €1 / CHF1 each 400 100 50
Retained earnings 987 224 40
1,387 324 90
Non-current liabilities
10% Debenture Notes 200 60

Current liabilities
Trade payables 87 36 18
Current taxation 32 11 10
119 47 28

Total equity & liabilities 1,706 431 118

The following additional information may be relevant:

(i) Acoff bought an 80% holding in the equity shares in Braggs on 1 April 2014, when the retained earnings of Braggs
were €180 million. The consideration was agreed at €250 million for these shares. This amount was paid in cash.
The “fair value” method is used by the group for calculating goodwill on all acquisitions. On 1 April 2014, the fair
value of the non-controlling interest in Braggs was independently assessed at €58 million.

(ii) Acoff bought a 90% holding in the equity shares of Van Cleff on 1 April 2015, when the retained earnings balance
in Van Cleff’s books stood at CHF31.2 million. The consideration consisted of an immediate cash payment of
CHF84 million. Van Cleff operates as an autonomous entity, although subject to managerial control by the
directors of Acoff. The fair value of the non-controlling interest in Van Cleff at 1 April 2015 was CHF9 million.

(iii) On 1 April 2014, certain patents formed part of the net assets of Braggs, but were not recognised in its entity
financial statements. These had a fair value of €20 million at the date of acquisition by Acoff. These patents were
due to expire 8 years after the date of acquisition by Acoff.

Page 1
(iv) During the financial year ended 31 March 2016, Acoff sold goods to Braggs amounting to €20 million. The
transfer price included a profit margin of 20%. Of these goods, 75% remained in the closing inventory of Braggs
at the reporting date. All these goods had been paid for at the reporting date.

(v) No dividends were paid or proposed in the year by any group company.

(vi) Acoff exercised the option permitted under IAS 27 Separate Financial Statements to carry all investments in
subsidiaries and associates at cost in its individual financial statements. All other investments are carried under
IFRS 9 Financial Instruments, and are correctly measured at the reporting date.

(vii) Goodwill was reviewed for impairment at each reporting date, and no losses were considered to have been
suffered since acquisition.

(viii) All workings may be rounded to the nearest €0.1m.

(ix) Relevant exchange rates were as follows:

o 1 April 2015 €1 = CHF 1.2


o 31 March 2016 €1 = CHF 1.05
o Average for year ended 31 March 2016 €1 = CHF 1.15

REQUIREMENT:

Prepare the Consolidated Statement of Financial Position for the Acoff group as at 31 March 2016 in accordance
with International Financial Reporting Standards. (23 marks)
(a)

Format & Presentation (1 mark)

Explain and quantify how the initial calculation and subsequent treatment of goodwill on the acquisition of Braggs
would have differed had the consolidated statement of financial position been prepared under FRS 100-102. You
(b)

are not required to redraft the statement in answer to this requirement.


(6 marks)

[Total: 30 MARKS]

Page 2
2. Kenny Plc is a public listed manufacturer. Its summarised consolidated financial statements for the year ended
31 March 2016 (with 2015 comparatives) are as follows:

Kenny Plc:
Consolidated Statements of Profit or Loss and Other Comprehensive Income for year ended 31 March.

2016 2015
€ million € million
Revenue 18,410 16,200
Cost of sales (15,200) (11,100)
Gross profit 3,210 5,100
Operating costs (3,750) (3,600)
Gains on revaluation of financial assets 20 40
Finance costs (49) (33)
Profit (loss) before taxation (569) 1,507
Income tax expense (80) (180)
Profit for the year (649) 1,327

Profit for the year attributable to:


Owners of the parent (654) 1,327
Non-controlling interests 5 -
Profit for the year (649) 1,327

Kenny Plc: Consolidated Statements of Financial Position as at 31 March:


2016 2015
€ million € million

Property, plant and equipment 2,360 2,400


Non-current assets:

Intangible assets 350 350


Goodwill 60 0
Financial assets 210 180
2,980 2,930

Inventory 400 275


Current assets:

Trade receivables 460 340


Bank 230
860 845

Total assets 3,840 3,775

Equity shares of €1 each 1,400 1,300


Equity:

Share premium 500 350


Retained earnings 504 1,205
2,404 2,855
Non-controlling interest 50 0
2,454 2,855

6% Bonds 2021 680 550


Non-current liabilities:

Current liabilities:
Trade payables and provisions 466 280
Bank overdraft 160 ---
Current tax payable 80 90
706 370

Total equity and liabilities 3,840 3,775

Page 3
The following notes should be taken into account, if relevant:

(i) On 1 April 2015, Kenny bought an 80% stake in another entity, Lenny Plc. The cost of this stake was €200 million,
satisfied by Kenny issuing 48 million equity shares valued at €2.50 each and €80 million in cash.

The fair value of the net assets acquired on the acquisition date was €180 million, consisting of the following:

• Property, plant & equipment €120m


• Intangible assets €30m
• Inventory €25m
• Cash €20m
• Trade payables (€15m)
€180m

The fair value of the non-controlling interest at the acquisition date was €47 million. Kenny Plc uses the full
goodwill method in all acquisitions. Goodwill was impairment tested at 31 March 2016, and any impairment loss
was correctly accounted for through operating expenses.

(ii) There were no disposals of non-current assets during the period. No intangible assets were acquired apart from
those acquired through the acquisition of Lenny Plc. Depreciation of property, plant & equipment amounted to
€207 million, charged to operating expenses. Amortisation of intangible assets was also charged to operating
expenses.

(iii) There were no non-cash adjustments to the 6% Bonds.

(iv) Included in the figure for “trade payables and provisions” at 31 March 2016 is a provision for warranty claims
amounting to €27 million (2015: €14 million).

(v) Equity dividends were paid during the period by Kenny and Lenny.

(vi) Financial assets which had cost €60 million, and had a carrying value on 31 March 2015 of €75 million, were
sold during the year for €78 million.

REQUIREMENT:

(a) Prepare a Consolidated Statement of Cash Flows for the Kenny group in accordance with IAS 7 - Statement of

(19 marks)
Cash Flows.

Format & Presentation (1 mark)

Evaluate, using suitable ratios where relevant, any insights revealed by the statement of cash flows into the
financial performance and position of the group as at 31 March 2016. (10 marks)
(b)

[Total: 30 MARKS]

Page 4
3. The following multiple-choice question contains eight sections, each of which is followed by a choice of
answers. Only one answer is correct in each case. Each question carries equal marks. On the answer
sheet provided indicate for each question, which of the options you think is the correct answer. Marks
will not be awarded where you select more than one answer for any question.

Record your answer to each section in the answer sheet provided.


REQUIREMENT:

1. On 1 April 2015, Ratzinger Plc held a property at a carrying value of €3 million. The buildings element of the
property (25% of the total value) had a remaining useful economic life of 10 years. On 1 October 2015, Ratzinger
Plc decided to sell the property, as it no longer needed it. On that date the property met all the IFRS 5 Non-Current
Assets held for Sale and Discontinued Operations criteria for classification as “held for sale”. The estimated fair
value less costs to sell was €3.25 million at 1 October 2015 and at the reporting date 31 March 2016.
Depreciation is charged on a straight line basis and time apportioned as appropriate.

What is the correct carrying value at 31 March 2016?

(a) €3,250,000
(b) €3,000,000
(c) €2,962,500
(d) €2,850,000

2. IAS 41 Agriculture applies to which of the following assets?

(a) Seeds awaiting planting


(b) Land used for growing trees
(c) Trees growing in a forest
(d) Lumber harvested and awaiting processing

3. Each of the following events occurred after the reporting date but prior to the date of approval of the financial
statements.

Which of the following should be treated as an adjusting event under IAS 10 Events After the Reporting Period?

(a) An earthquake caused €5 million of uninsured damage.


(b) A customer went bankrupt owing the company €5 million in trade receivables.
(c) A customer was injured on a company premises, and filed a lawsuit for €5 million.
(d) None of the above.

4. On 1 April 2015, Egvern Plc borrowed €15 million in order to fund the construction of a new building. The interest
rate was 6% payable annually in arrears. On 1 July 2015, construction commenced. On 1 October 2015, the due
date, €10 million was paid to the contractor as the first stage payment. On 1 December 2015, a further €10
million was paid to the contractor. Construction was still in progress at the reporting date of 31 March 2016.
Unused funds were used for general corporate purposes until needed to fund the construction.

Which of the following amounts should be capitalised under IAS 23 Borrowing Costs?

(a) €900,000
(b) €600,000
(c) €450,000
(d) €400,000

Page 5
5. Berger Plc invested in a bond on 1 April 2015, at a cost of €40 million. The costs of purchase were €2 million.
The nominal and maturity value of the bond was €50 million, and the coupon interest rate was 2% annually in
arrears. The maturity date was 31 March 2020, giving an effective yield to maturity of 5.775%.

What should be the carrying value of the bond at the reporting date of 31 March 2016 under the amortised cost
method of IFRS 9 Financial Instruments, assuming the interest was paid as scheduled?

(a) €43.4255 million


(b) €41.31 million
(c) €43.6255 million
(d) €42 million

6. Under IFRS 11 Joint Arrangements which of the following is true?

(a) All joint arrangements must be accounted for using the equity method.
(b) There must be two and only two parties to an arrangement before it may be classed as a joint arrangement.
(c) There are two types of joint arrangement: joint operation and joint venture.
(d) All joint arrangements must be separate legal entities.

7. The following statements relate to the required accounting treatment of investment properties under the fair value
model of IAS 40 Investment Property.

(i) Investment properties are not depreciated.


(ii) Investment properties must be revalued to fair value at each reporting date.
(iii) Gains and losses on revaluation of investment properties are recognised in profit or loss.

Which of the above statements are true?

(a) (i) and (ii) only


(b) (ii) and (iii) only
(c) (i) and (iii) only
(d) (i), (ii) and (iii)

8. Under IAS 32 Financial Instruments – Presentation which of the following is FALSE?

(a) All financial instruments are either assets, liabilities or equity.


(b) All financial instruments have two counterparties.
(c) Financial liabilities are financial instruments that create an obligation on the part of one counterparty to
transfer cash to the other counterparty.
(d) Shares that usually earn a dividend are classified as financial liabilities in the books of the issuing entity.

[Total: 20 MARKS]

Page 6
Answer either Question 4 or Question 5
IAS 20 Accounting for Government Grants and Disclosure of Government Assistance sets out the requirements
for recognising as income any grants received from government agencies, together with any repayments of such
4.
grants.

On 1 January 2014, Gilmartin Plc (Gilmartin) applied to a government agency for a grant to assist with the
construction of a factory in Portlaoise. The proposed construction cost of the factory was €52 million and the
company projected that 350 people would be employed on its completion. The land was already owned by
Gilmartin.

On 1 March 2014, the government agency offered to grant a sum amounting to 25% of the factory’s construction
cost to a maximum of €13 million. The grant aid was to be payable on completion, and would be repayable on
demand if total employment at the factory fell below 300 people within 5 years of completion.

At the financial year end, 31 March 2014, Gilmartin had accepted the offer of grant aid, and had signed contracts
for the construction of the factory at a total cost of €52 million. Construction work was due to commence on 1
April 2014.

By 31 March 2015, the factory had been completed on budget, 400 people were employed ready to commence
manufacturing activities, and the government agency agreed that the conditions necessary for the drawdown of
the grant had been met.

On 1 April 2015, the factory was brought into use. It was estimated that it would have a ten-year useful economic
life. On 1 June 2015, the government agency paid over the agreed €13 million. In addition, the company sought
and was paid an employment grant of €1.2 million as employment exceeded original projections. This is expected
to be payable annually for 5 years in total, at a rate of €12,000 per additional person employed over 300 in each
year. There are no repayment provisions attached to the employment grant. The directors of Gilmartin expect
employment levels to exceed 350 people for at least 4 further years from 31 March 2016.

REQUIREMENT:

Detail the requirements of IAS 20 Accounting for Government Grants and Disclosure of Government Assistance
with respect to government grants to aid capital expenditure. Your answer should cover the initial recognition and
(a)

subsequent treatment of these grants.


(7 marks)

Discuss, showing calculations and journal entries where relevant, how Gilmartin Plc should record the above
transactions and events in its financial statements for years ended 31 March 2014, 2015 and 2016.
(b)

(10 marks)

Advise what accounting adjustments which would be necessary should it become apparent at 31 March 2017,
that employment at the factory would soon drop below 300 people.
(c)

(3 marks)

[Total: 20 MARKS]

Page 7
OR
5.
IAS 38 Intangible Assets sets out the principles of accounting for the recognition and measurement of intangible
assets. The standard differentiates between intangible assets acquired individually, those acquired as part of a
(a)

business combination, and those which are internally generated. IAS 38 relies on the concept of fair value to
measure intangibles, but the strength of the fair value test varies depending on the objective.

Handsetter Plc (Handsetter) has entered into the following transactions during the financial year ended 31 March
2016. The company seeks to maximise the reported value of its assets wherever possible.

(i) On 1 April 2015, Handsetter acquired, from a bankrupt competitor, a licence to provide radio broadcast
services to a region within Ireland. This licence would have been originally issued by the government for a
ten-year period at zero cost, but has a market value due to its exclusivity. The cost of the licence to
Handsetter was €3.3 million, and the remaining useful economic life was 6 years.

(ii) On 1 April 2015, Handsetter commenced work on developing a new technology to enhance the quality of
the radio broadcasts. It purchased a number of patents at a cost of €2 million and spent a further €6 million
developing the technology, as well as €2 million researching the international market for the technology in
advance of its launch. The directors of Handsetter were confident throughout the development process that
the technology had massive potential to generate future economic benefit. On 31 March 2016, this opinion
was validated when a rival broadcaster offered Handsetter €15 million for its partially developed
technology project.

(iii) As a result of Handsetter’s growing reputation in the broadcasting industry, the directors commissioned a
consulting firm to value its brand name. The brand name has not been recognised as an asset in the
financial statements to date. On 31 March 2016, the consultants issued a report stating that the fair value
of Handsetter’s brand was €20 million.

(iv) Handsetter has a portfolio of patents it developed over the past few years. These represent technologies
and processes used in the company’s business to generate economic benefits. The total carrying value of
these patents was €2.8 million at 1 April 2015. They originally had a 15-year useful economic life, but on
average seven years remain to their expiry date. The directors propose, at 31 March 2016, to revalue this
portfolio to its estimated fair value of €5 million.

REQUIREMENT:

Discuss the requirements of IAS 38 Intangible Assets with respect to the initial recognition and measurement of
intangible assets acquired:
(a)

(1) separately for cash,


(2) as part of a business combination, and
(3) internally generated. (9 marks)

In each of the scenarios (i) to (iv) above, prepare a briefing not for Handsetter’s financial controller advising on
the appropriate accounting treatment for the intangible assets for year ended 31 March 2016.
(b)

(11 marks)

[Total: 20 MARKS]
END OF PAPER

Page 8
SUGGESTED SOLUTIONS
THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND

CORPORATE REPORTING
PROFESSIONAL 1 EXAMINATION – APRIL 2016

SOLUTION 1

Marking Scheme:

Basic consolidation (100% Acoff + 100% Braggs + 100% Van Cleff translated) 3
Goodwill and translation thereof (including NCI at acquisition date) 4
(a)

Translation of Van Cleff’s SOFP 5


Fair value adjustments and post acq movements 2
Intra group sales of inventory 2
Reserves calculation and consolidation – retained earnings and translation 5
NCI calculation at reporting date 2
Presentation 1
Subtotal 24

Explanation of differences between IFRS and FRS 100-102 in relation to goodwill 2


Calculation of goodwill at acquisition under FRS 100-102 2
(b)

Calculation of impairment losses and carrying value 2


Subtotal 6

[Total: 30 Marks]

Page 9
Suggested solution

Group structure:
(a)

Acoff has owned 80% of Braggs for 2 years. This gives control therefore Braggs is a subsidiary.
Acoff has owned 90% of Van Cleff for the full year therefore Van Cleff is a subsidiary.
Van Cleff’s financial statements are denominated in Swiss Francs, hence it needs to be “translated” into euro prior
to consolidation.

[Plan = 100% Acoff + 100% Braggs + 100% Van Cleff as translated]


Acoff Group plc: Consolidated Statement of Financial Position as at 31 March 2016
€ million

Property, plant and equipment (750 + 223 + 76.2 (W5)) 1,049.2


Non current assets:

Goodwill (8 + 11.2) (W1) 19.2


Intangible assets (W6) 15.0
Other investments (460 + 76 – 250 - 70) exclude group investments (W1) 216.0
1,299.4

Inventories (310 + 42 + 12.4 (W5) – 3 (W6)) 361.4


Current assets:

Trade receivables (122 + 75 +16.2 (W5)) 213.2


Cash & bank (64 + 15 + 7.6 (W5)) 86.6
661.2
Total assets 1,960.6

Equity shares 400.0


Equity:

Retained earnings (W2) 1,022.1


Translation reserve (W3) 10.6
1,432.7
Non-controlling interest (W4) 75.2
1,507.9

10% debenture notes (200 + 60 260.0


Non-current liabilities:

Trade payables (87 +36 + 17.1 (W5)) 140.1


Current liabilities:

Current taxation (32 + 11 + 9.5 (W5)) 52.5


192.6
Total equity & liabilities 1,960.6

W1
Calculation of goodwill on acquisition of:
Braggs Van Cleff
€ million € million CHF million € million
Consideration
Rate

Cash 250 84 1.2 70.0

Value of NCI 58 9 1.2 7.5


FV of identifiable net assets acquired
Equity share capital 100 (50.0) 1.2 (41.7)
Pre-acquisition reserves 180 (31.2) 1.2 (26.0)
FVA – Patents 20 300

Goodwill at acquisition 8 11.8 1.2 9.8


Exchange gain (loss) (balancing figure – to translation reserve) 1.4
Goodwill 31 March 2016 11.8 1.05 11.2

Page 10
Goodwill on the acquisition of Van Cleff is considered an asset of that entity. As it is not included in its SOFP (and
Tutorial note:

hence not translated as part of that step) it needs to be translated separately. The treatment of the gain or loss on
translation depends on the method used to calculate goodwill in the first place. If full fair value method is used (as
is the case here), the gain is attributed to the parent and the NCI in proportion to their ownership interests.

If goodwill were calculated under the partial method, this means only the parent’s portion of goodwill is recognised.
Hence any exchange gain or loss on goodwill would be attributable to the parent only. This is the same principle
that applies to goodwill impairment losses.

W2
Group retained earnings at 31 July 2015 Acoff Braggs Van Cleff
€ million € million € million
Balance per SOFP (total at y/e) 987 224 33.65
Less balance at acquisition (note (i)) (180) (26.00)
Amortisation of FVA Patent (W6) (5)
Elimination of unrealised profit in inventory (W7) (3)
Adjusted reserves for consolidation 984 39 7.65
Consolidate Braggs to group (80% * 39) 31.2
Consolidate Van Cleff to group (90% * 7.65) 6.9
Group total 1,022.1

W3
Group translation reserve at 31 July 2015 Acoff Braggs Van Cleff
€ million € million € million
Balance per translated SOFP (W5) 10.4
Exchange gain on translation of goodwill (W1) 1.4
Total 11.8

Consolidate to group SOFP (90% * 11.8) 10.6

[Consolidate to NCI (10% * 11.8) = 1.2]

W4
Non-controlling interest at 31 July 2015 Braggs Van Cleff
€ million € million
Balance at acquisition (from W1) 58 7.5
Share of post-acquisition retained earnings from W2
Braggs: 20% * 39 7.8
Van Cleff: 10% * 7.65 0.8
Share of post-acquisition translation reserve from W3 1.2
___ ___
Consolidated total €75.3 million 65.8 9.5

Page 11
W5
€ million
Non-current assets:
Translation of Van Cleff’s SOFP CHF million Rate

Property, plant & equipment 80 1.05 76.19


80 76.19
Current assets:
Inventories 13 1.05 12.38
Trade receivables 17 1.05 16.19
Cash & bank 8 1.05 7.62
38 36.19

Total assets 118 112.38

Equity:
Equity share capital of €1 / CHF1 each 50 1.2 41.67
Retained earnings: Pre-acquisition 31.2 1.2 26.00
Post-acquisition 8.8 40 1.15 7.65
Translation reserve (balancing figure) 10.40
90 85.72
Current liabilities:
Trade payables 18 1.05 17.14
Current taxation 10 1.05 9.52
Total liabilities 28 26.66

Total equity & liabilities 118 112.38

Tutorial Note:
Assets and liabilities are translated at the closing rate, pre-acquisition equity at the rate ruling at the acquisition date,
and post acquisition equity at the rate ruling when earned. The balancing figure in all of this represents the currency
gain (or loss) earned (or suffered) during the period between the acquisition or earning of the net assets, and the
reporting date.

W6
Fair value adjustments (note (iv)):

Patents Braggs €20m (€5m)** €15m


At acquisition Movement At rep. date

**Movement = cumulative amortisation of the patents since acquisition: €20m / 8 yrs * 2 yrs = €5m. This is charged
to the earnings of the company which holds (and therefore depreciates) the asset, namely Braggs. Hence in the
group accounts:

Dr Intangible assets €15.0m


Dr Retained earnings – Braggs €5.0m
Cr Goodwill (FV net assets) €20.0m

Tutorial Note:
IAS 38 may require certain intangible assets not to be recognised (appear) in entity financial statements. This is
usually because they were internally generated and did not meet the criteria for recognition at the time. This does
not necessarily mean they have no value. It is not uncommon for assets with an economic value not to be recognised
in the financial statements under IFRS.

In a takeover situation, if a fair value is assignable to these assets, they are required to be recognised in the group
financial statements at their fair value. This recognises the fact that the acquirer has accorded these assets value
in deciding how much to pay for the entity. If this value is not allocated to the intangible asset, it will be subsumed
into goodwill. This does not change their accounting treatment in the individual books of the entity, merely in the
group financial statements.

Page 12
W7

Unrealised profit (URP) on goods held in closing inventory:


Intra-group trading of goods

(€20m * 20/100) * 75% (sold by Acoff therefore NCI IS NOT affected) €3.0m
Adjustment to reduce reserves (Acoff) and Inventory:
Dr Retained earnings (Acoff) €3.0m
Cr Inventory €3.0m

Under FRS 100-102 goodwill is calculated under the partial method only. Also, there is no annual impairment
review. Instead a 10 year useful economic life is assumed and goodwill is amortised over this period.
(b)

Hence, in relation to Braggs, the goodwill calculation would be as follows:

€ million
Cost of Investment 250
Value of NCI (20% * 300) 60

Fair value of identifiable net assets acquired:


Equity share capital 100
Retained earnings 180
FVA – patent 20
(300)
Goodwill at acquisition 10
Amortisation for year ended 31 March 2015 (1)
Amortisation for year ended 31 March 2016-01-23 (1)
Carrying value 31 March 2016 8

Page 13
SOLUTION 1

Marking Scheme:

Statement of cash flows


Start with profit before taxation 1
(a)

Deduct gains on revaluation of financial assets 1


Deal with finance costs (twice) 1
Depreciation on PPE (add back) 1
Calculate and add back goodwill impairment 1
Calculate and add back amortisation of intangibles 1
Calculate movement of working capital items 4
Calculate taxation paid, and deduct 1
Calculation and deduction of payments to acquire subsidiary 1
Calculation and deduction of payments to acquire PPE 2
Calculation and deduction of payments to acquire financial assets 1
Calculation and addition of proceeds of loan note 1
Calculation and addition of proceeds of share issue 1
Calculation and deduction of equity dividends 1
Calculation and deduction of dividend payments to NCI 1
Presentation 1
Subtotal 20

Discussion and analysis


Maximum of 4 marks for calculation of ratios. Analysis should focus on the SOCF, but may refer to other
(b)

statements in support. Candidates scoring 7-10 marks should be displaying particularly insightful analysis.

Any 10 valid points / ratios for 1 mark each 10


Subtotal 10

[Total: 30 Marks]

Page 14
Suggested solution

(a) Kenny plc: Statement of Cash Flows for year ended 31 March 2016

€ million € million
Operating Activities
Profit before taxation (569)
Gains on revaluation of financial assets (20)
Finance costs 49
Goodwill impairment charge 7
Depreciation of PPE (W1) 207
Amortisation of intangibles (W2) 30

Movement in inventory (400 – (275 + 25)) (100)


Movement in trade receivables (460 – 340) (120)
Movement in trade payables [(466-27) – (280-14+15)] 158
Movement in provision for warranty claims (27-14) 13
224
Finance costs paid (49)
Taxation paid (W7) (90) 85

Net cash flow from operating activities (484)

Investing Activities
Cash paid to acquire subsidiary (W8) (60)
Cash paid to acquire PPE (W1) (47)
Cash paid to acquire financial assets (W4) (10)

Net cash flow from investing activities (117)

Financing Activities
Issue of 6% bonds 130
Proceeds of equity share issue (W5: 52+78) 130
Equity dividends paid (W5) (47)
Dividend paid to non-controlling shareholders (W5) (2)

Net cash flow from financing activities 211


Net cash flow for the year (390)
Opening cash & cash equivalents 230
Closing cash & cash equivalents (160)

W1
PPE
€ million € million
Bal b/d 2,400 Depreciation (note ii) 207
Acquired on acq. of Lenny plc (W8) 120

Acquired for cash (balancing figure) 47 Bal c/d 2,360

2,567 2,567

W2
Intangible Assets
€ million € million
Bal b/d 350 Impairment charge (bal fig) 30
Acquired on acq. of Lenny plc (W8) 30 Bal c/d 350

380 380

Page 15
W3
Goodwill
€ million € million
Bal b/d -- Impairment charge (bal fig) 7
Recognised on acq. of Lenny plc (W8) 67 Bal c/d 60

67 67

W4
Financial Assets
€ million € million
Bal b/d 180
Profit or loss 20 Bal c/d 210
Acquired for cash (bal fig) 10
210 210

W5 – Equity Reconciliation
Share Cap. Share Prem. R/E NCI
€ million € million € million € million
Opening Balance 1,300 350 1,205 0
Profit for year (654) 5
Issued for acq. (W8) 48 72
Arising on acq. (W8) 47
Shares issued cash 52 78
Dividend paid to NCI (2)
Equity dividends paid (47)
Closing balance 1,400 500 504 50

W6
6% Bond
€ million € million
Bal b/d 550
Bal c/d 680 Cash (bal fig) 130
680 680

W7
Taxation
€ million € million
Cash paid (balancing figure) 90 Bal b/d 90
Bal c/d 80 SPLOCI 80
170 170

Cost of investment (80%)


W8 – Acquisition€ million

Shares issued (48 share capital, 72 share premium) 120


Cash 80
200
FV of NCI 47
FV of net assets at acquisition:
PPE 120
Intangible assets 30
Inventory 25
Cash 20
Trade payables (15)
(180)
Goodwill 67

Net cash flow impact on purchase is an outflow of €60m (cash paid 80m less cash acquired 20m).
All other implications should be recorded in the respective accounts.
Page 16
(b) Discussion and analysis of statement of cash flows

Relevant points might include the following:


• The company has lost a significant sum of money during the period. This is clear from the statement
of profit or loss. In addition, the company’s operating cash flow is deeply negative. This is unsustainable
and urgent action is necessary.
• Investment continued during the year, shown by the outflow in this section. However investment in
property, plant & equipment was lower than depreciation, again suggesting this was insufficient to
sustain operating capacity into the long term.
• The cash deficit was offset to a large extent by the issue of new equity shares and loan notes. Again,
this is unlikely to be sustainable into the future, as the willingness of investors to lend or purchase
equity is dependent on expectations of profit.
• It is questionable whether the payment of an equity dividend was advisable given the losses and cash
deficit for the year. Whilst the entity has sufficient accumulated profits to legally pay a dividend, it makes
little sense to incur the costs of raising new equity and simultaneously return significant sums to equity
holders through dividends.
• Liquidity ratios are tightening, increasing the urgency of finding a solution to the problem. The current
ratio has reduced from 2.28 to 1.22. Inventory, receivables and payables days have all disimproved,
but not seriously. The main cause of the deterioration in liquidity is the cash deficit.
• The company has significant potential sources of cash to see it through a period of repair. Financial
assets could be sold, and working capital could be much more tightly managed. However this fiscal
space could burn up very quickly if current losses continue.

Advanced points might include the following:


• It is clear that the losses have not been caused by the acquisition. In fact, it is clear that the acquired
company made a profit. This is evidenced by the portion of the profit for the year attributable to the non-
controlling interest. The fact that this is positive implies that the subsidiary made a profit.
• Revenue has increased by €2.2bn whilst gross profit declined by €1.9bn. This suggests that the main
cause of the drop in profits is the reduced gross margin (from 31% to 17%). The causes of this should
be investigated urgently. Possible causes are (1) excessive price discounting to win market share, (2)
cost increases not passed on to customers through higher prices, (3) mismanagement of inventory or
cash.

Ratio calculations:

Gross margin 3,210 / 18,410 = 17% 5,100 / 16,200 = 31%


2016 2015

Current ratio 860 / 706 = 1.22:1 845 / 370 = 2.28:1


Inventory days 400/15,200*365 = 9.61 275 / 11,100 *365 = 9.04
Receivables days 460/18,410 * 365 = 9.12 340/16,200*365 = 7.66
Payables days (466-27)/15,200*365 = 10.54 (280-14)/11,100*365 = 8.75

Page 17
SOLUTION 3

Marking scheme:

Each correct mark gains 2.5 marks. No partial marks are awarded. Workings are not marked. [Total: 20 Marks]

Suggested solution:

1 Answer (c)

On 1 October, the date the IFRS 5 criteria were met to carry the property as “held for sale”, 6 month’s
depreciation should have been charged. The depreciation amount should be €3,000,000 * 25% * 6/12 =
€37,500. This brings the carrying value to €2,962,500 (€3,000,000 – 37,500). The carrying value on transfer
to “held for sale” should be the LOWER of the carrying value immediately before transfer or its fair value less
costs to sell.

2. Answer (c)

IAS 41 defines agricultural assets as those actually growing. Seeds awaiting planting and products harvested
are inventory items under IAS 2. Land is an IAS 16 asset.

3. Answer (b)

IAS 10 specifically requires the bankruptcy of a customer to be considered an adjusting event. The
presumption is that the conditions leading to the bankruptcy existed at the reporting date.

4. Answer (d)

IAS 23 requires that three conditions be met before capitalisation of finance costs takes place. These are (1)
finance costs are being incurred; (2) activities necessary to bring the asset into use are under way; and (3)
expenditure has been incurred. On this basis all three are met only on the payment of the first €10 million to
the contractor on 1 October 2015. The finance cost on this amount from 1 October 2015 to 31 March 2016
should be capitalised (€10m * 6% * 6/12), amounting to €300,000.

On 1 December 2015 a further €10 million was paid to the contractor. However only €5 million of this was
borrowed. Hence (€5m * 6% * 4/12) €100,000 should be capitalised.

5. Answer (a)

The carrying value of the bond is calculated as follows:


€ million
Cost (including costs of purchase) 42
Finance cost for year (42 * 5.775%) 2.4255
Coupon payment (€50m * 2%) (1)
Closing carrying amount 43.4255

6. Answer (c)

(a) Is incorrect as a joint operation is accounted for by each party individually dealing with its portion of
assets, liabilities, income and expenses.
(b) Is incorrect as a joint arrangement is not limited to two venturers under IFRS 11.
(c) IS correct.
(d) There is no requirement that a joint arrangement be a separate legal entity. A joint venture must be a
separate entity, but a joint operation may or may not be.

Page 18
7. Answer (d)

All three statements are true under the fair value model of IAS 40.

8. Answer (d)

Shares are classified as debt or equity depending on the obligations attaching to them. If a dividend is
compulsory it is likely that the instrument is a liability. However a regularly paid dividend, especially on an
equity share, is not normally compulsory. Hence such shares would be classified as equity.

Page 19
SOLUTION 4

Marking Scheme:

Answer should cover the two options for initially recognition of capital grants, netting against the cost of the
asset acquired, and the setting up of a deferred income account. Subsequent treatment should detail the
(a)

amortisation of the grant to income, and any repayment potential.


Subtotal 7

2014 accounting implications 2


2015 accounting implications 4
(b)

2016 accounting implications 4


Subtotal 10

(c) Three relevant points at 1 mark each 3

[Total: 20 Marks]

Suggested solution:

Grants in respect of capital expenditure are to be recognised within income as the related assets are expensed
to income. This normally happens through depreciation or sale.
(a)

On receipt of a capital grant, there are two options open to an entity under IAS 20 Accounting for Government
Grants and Disclosure of Government Assistance.

First, the grant may be credited to the asset account in respect of which the grant is received. This has the
effect of lowering the carrying value of the asset, with a consequential reduction of any depreciation charge.
This has the effect of benefiting the profit for the accounting periods in which the asset is used. This method
is primarily a legacy of the income-statement driven approach to accounting. The Conceptual Framework
currently in issue is financial position driven. Showing an asset at a cost net of grants would conflict with the
framework.

The second allowable method is the deferred income approach. Under this method a capital grant is credited
to a separate account on receipt. This account is held as a liability, and amortised over the period expected
to benefit from the asset’s use. The asset is kept at its cost less depreciation. The net effect on the profit or
loss is the same as under method 1, but the balances in the statement of financial position are more likely to
reflect the true asset values. As such, this method is more aligned with the philosophy of current accounting
standards.

The deferred income balance should be reported as a current liability to the extent that it is expected to be
recognised as income within a period of 12 months. It should be recognised as a non-current liability
otherwise.

If an asset in respect of which a grant was received is subsequently sold, and there are no repayment
implications as a result of the sale, any unamortised portion of the grant can be recognised immediately in
income.

If there are repayment implications, provision should be made for repayment as a liability or disclosure as a
contingent liability in accordance with the principles contained in IAS 37 Provisions, Contingent Liabilities
and Contingent Assets.

Any unamortised balance in deferred income accounts should be used to provide for repayment if necessary.
Once these are used up, a charge should be made to profit or loss.

Page 20
Year ended 31 March 2014:
No accounting entry is made in this financial year, as no transaction has yet been entered into. A capital
(b)

commitment exists, and should be disclosed in the notes. The grant approval should be disclosed also.

Year ended 31 March 2015:


At this date, the factory should be recorded at its cost of €52 million. As all conditions for the payment of the
grant have been met, recognition should be made of this amount receivable also. As the factory has not yet
been brought into use, no depreciation will be charged for the year. Similarly, no amortisation of the grant will
take place in the period.

Recognition of factory:
Dr Property, plant & equipment €52 million
Cr Cash €52 million
(New factory constructed as a cost of €52 million)

Recognition of grant:

Dr Government grant receivable (current asset) €13 million


Option 1

Cr Property, plant & equipment €13 million


(Government grant approved, not received yet)

Dr Government grant receivable (current asset) €13 million


Option 2

Cr Deferred income – current liability €1.3 million


Cr Deferred income – non-current liability €11.7 million
(Government grant approved, not received yet)

Assuming the factory has a useful life of 10 years, as stated, 10% of the amount will be recognised as income
within the next financial year. This amount should be treated as a current liability.

Year end 31 March 2016:


There are a number of transactions to record based on the new factory. These are (1) depreciation and (2)
amortisation of the grant. In addition, the cash was received from the government agency.

Receipt of grant:
Dr Cash €13 million
Cr Government grant receivable €13 million
(Receipt of cash grant from government agency)

Depreciation of factory:
Option 1

Dr Profit or loss €3.9 million


Cr Accumulated Depreciation – PPE €3.9 million
(Depreciation of cost of factory net of grant over 10 years)

Depreciation of factory:
Option 2

Dr Profit or loss €5.2 million


Cr Accumulated Depreciation – PPE €5.2 million
(Depreciation of gross factory cost over 10 years)

Dr Deferred income €1.3 million


Amortisation of grant:

Cr Profit or loss €1.3 million


(Amortisation of grant over 10 years, reflecting the proportional expensing of the factory to which the grant
relates)

The employment grant relates entirely to the cost of employing staff in that year. Hence it should be entirely
recognised as income in the year ended 31 March 2016.

Page 21
Recognition of employment grant:
Dr Cash €1.2 million
Cr profit or loss 1.2 million
(recognition of employment grant as income as received)
(10 marks)

At this point it is becoming likely that the grant will be repayable, as employment levels are likely to drop
below 300. Under the original grant, this condition creates a potential liability to repay the €13 million.
(c)

At 31 March 2017, an assessment must be made regarding the likelihood of repayment being necessary. If
this is deemed probable, provision must be made for the cost of repayment.

If option 1 was used to account for the grant, the cost of the factory will be increased by the amount of the
grant, and an increased amount of depreciation charged so that the cumulative depreciation charged since
purchase is that which would have been charged had no grant been received.

If the second option was used, the amount of repayment will be charged to any deferred income balance in
the first instance, and to profit or loss thereafter.
(3 marks)

[Total: 20 MARKS]

Page 22
SOLUTION 5

Marking Scheme:

9 valid points at 1 mark each, with at least 2 from each of the three sections requested.
Subtotal 9
(a)

4 scenarios at 3 marks each to a maximum of


Subtotal 11
(b)

[Total: 20 Marks]

Suggested solution:

(a) An intangible asset is an identifiable non-monetary asset without physical substance.

The enterprise must have the ability to control the asset in order to obtain economic benefit from it.
Examples include brand names, software, licences, franchises, copyrights, patents, customer lists, quotas,
etc…

Recognition
An intangible asset should be recognised if:

• It is probable that economic benefits associated with the asset will flow to the entity.
• The cost / value of the asset can be measured reliably

If these criteria are not met, the relevant expenditure should be expensed. It is prohibited to reinstate any
intangible asset originally charged to expenses.

Specific guidance for certain categories of intangible asset:

(1) Purchased separately


If the asset was purchased separately, recognise it as an intangible at cost provided it meets the
definition above.
If the asset is acquired for free or nominal sum by way of government grant e.g. radio licence, it may
be recognised at fair value (under IAS 20 government grants). If this option is not taken, it must be
recognised at cost including directly attributable expenditure.

(2) Purchased as part of a group of assets (e.g. takeover of a business)


If purchased as part of a business, capitalise the asset at fair value if it can be reliably measured on
initial recognition. If not, include with goodwill.
The cost of assets acquired under an exchange is measured as the value of the asset given up in
return.

(3) Internally generated


Internally generated goodwill should never be recognised.
Internally generated intangibles other than goodwill may not be recognised unless there is an active
market in homogeneous assets allowing a fair value to be attributed to the asset. Most internally
generated assets will not meet this rule.

One exception to the above rule is the issue of development costs (NOT research). These should be
capitalised if the following criteria are met:

• Probable that product being developed will generate future economic benefits
• Intention to complete and use / sell
• Resources are available to complete project
• Ability to use / sell
• Technical feasibility of the product being developed
• Expenditure can be measured reliably.

Page 23
Computer software should generally be capitalised at cost, but operating systems should be included with the
hardware cost within PPE, not within intangibles.

Any expenditure initially written off as an expense may not be retrospectively capitalised under any
circumstances. However, an intangible asset written off due to changes in circumstances may be reinstated
if those circumstances reverse.

Amortisation of intangible assets


If intangibles are considered to have an indefinite useful economic life (UEL), they should not be amortised.
If this is the case, an annual impairment review is required.

If UEL is not indefinite, amortise over the UEL using a method which best reflects the pattern of consumption
of economic benefits. This period should be reviewed at least annually.

The amortisation charged should be expensed to profit or loss unless required to be capitalised by another
standard.

Revaluation of intangibles
Intangibles may be revalued only if a market value is available. This means an active market exists in identical
assets with public prices available.

The entity may choose to adopt the cost model under IAS 38, therefore never revaluing assets.

Treatment of revaluation gains and losses is similar to that of tangible non-current assets under IAS 16.

(9 marks)

As the licence was acquired individually, it is capitalised at its cost. The licence should be depreciated over
(b)

its useful economic life, here 6 years. Revaluation is unlikely to be permitted as each licence is likely to be
(i)

unique. An active market in identical assets cannot exist for unique assets. Amortisation amount: €3.3 million
/ 6 years = €0.55 million per annum. (3 marks)

(ii) This intangible asset was partly purchased, and partly internally generated through enhancement expenditure.

The asset purchased should be capitalised at cost. This was €2 million. And further development costs should
be capitalised only if they meet the IAS 38 criteria for capitalisation. It would appear that these criteria were
met as the directors were confident of the potential of the technology since their original purchase. Hence,
the €6 million spent developing the technology should be capitalised. The €2 million spent researching the
international market may not be capitalised, and should be written off to profit or loss. The €15 million offer
may not be recognised unless it is accepted. Revaluation of intangibles is only permitted by reference to an
active market in identical assets. This asset is unique, hence whilst it may be valuable, it cannot be verified
by reference to an active market. Therefore no revaluation is permitted. (3 marks)

The brand name is internally generated. Hence it may not be recognised unless it meets the IAS 38 criteria
for recognising development projects as intangible assets. Brand names do not meet these criteria for several
(iii)

reasons:

(1) They do not constitute development costs;


(2) The expenditure to create the asset is not easily separable;
(3) It is not possible to demonstrate any certainty over the future economic benefit to be generated.

Hence, the brand should not be capitalised. (3 marks)

No revaluation is permitted, as no active market exists for identical patents. By definition, patents are unique
and cannot have identical market matches.
(iv)

The portfolio should be carried at cost less accumulated amortisation. Amortisation should be charged for year
ended 31 March 2016 at 1/7 of €2.8 million, or €0.4 million. This should be taken to profit or loss unless it
qualifies to be capitalised as part of a development project.
(3 marks)
Page 24
CORPORATE REPORTING
PROFESSIONAL 1 EXAMINATION - AUGUST 2016

NOTES:
You are required to answer Questions 1, 2 and 3. You are also required to answer either Question 4 or 5.
Should you provide answers to both Questions 4 and 5, you must draw a clearly distinguishable line through
the answer not to be marked. Otherwise, only the first answer to hand for Question 4 or 5 will be marked.

Note: You have optional use of the Extended Trial


Balance, which if used, must be included in the answer booklet.

Provided are pro-forma:

Statements of Profit or Loss and Other Comprehensive Income By Expense, Statements of Profit or Loss
and Other Comprehensive Income By Function, and Statements of Financial Position.

TIME ALLOWED:
3.5 hours, plus 10 minutes to read the paper.

INSTRUCTIONS:
During the reading time you may write notes on the examination paper, but you may not commence
writing in your answer book. Please read each Question carefully.

Marks for each question are shown. The pass mark required is 50% in total over the whole paper.

Start your answer to each question on a new page.

You are reminded to pay particular attention to your communication skills, and care must be taken
regarding the format and literacy of your solutions. The marking system will take into account the
content of your answers and the extent to which answers are supported with relevant legislation, case
law or examples, where appropriate.

List on the cover of each answer booklet, in the space provided, the number of each question
attempted.

NB: PLEASE ENSURE TO ENCLOSE YOUR ANSWER SHEET TO QUESTION 3 IN THE


ENVELOPE PROVIDED.

The Institute of Certified Public Accountants in Ireland, 17 Harcourt Street, Dublin 2.


THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND

CORPORATE REPORTING
PROFESSIONAL 1 EXAMINATION – AUgUST 2016
Time allowed: 3.5 hours, plus 10 minutes to read the paper.
You are required to answer Questions 1, 2 and 3. You are also required to answer either Question 4 or 5.
Should you provide answers to both Questions 4 and 5, you must draw a clearly distinguishable line through the
answer not to be marked. Otherwise, only the first answer to hand for Question 4 or 5 will be marked.
You are required to answer Questions 1, 2 and 3.
1. Mizzell Plc (Mizzell) is a public limited company based in Ireland. It has shareholdings in two other companies,
Buckley Plc (Buckley) and Feeney Plc (Feeney). Statements of financial position are shown below for all three
companies as at 31 July 2016.

Statements of Financial Position as at 31 July 2016

Mizzell Plc Buckley Plc Feeney Plc


€ million € million € million
Non-current assets
Property, plant & equipment 1,170 55 155
Intangible assets 268 120 47
Investments in group companies at cost 167
Financial assets 190 32 7
1,795 207 209
Current assets:
Inventories 220 142 31
Trade receivables 330 79 37
Cash & bank 140 49 9
690 270 77

Total assets 2,485 477 286

Equity:
Equity share capital of €2.00 each 1,190 200 100
Capital reserves 350 80 20
Retained earnings 358 65 61
1,898 345 181
Non-current liabilities:
6% loan notes 100
Contingent consideration 12
Obligations under finance leases 243
355
Current liabilities:
Trade and other payables 186 94 75
Current taxation 46 38 30
Total liabilities 232 132 105

Total equity & liabilities 2,485 477 286

The following additional information may be relevant:

(i) Mizzell bought 60 million ordinary shares in Buckley on 1 August 2014, when the capital reserves of Buckley were
€60 million and the retained earnings of Buckley were €40 million. The consideration was agreed at €155 million
in cash on the date of purchase, plus a contingent payment of €25 million to be paid on 1 August 2016, provided
profits after tax were at least €25 million per year on average. The fair value of the contingent consideration was
estimated at €12 million at the acquisition date, and this amount was capitalised as part of the cost of investment
in accordance with IFRS 3 - Business Combinations. This estimate was unchanged at 31 July 2015. However,
significant losses were incurred by Buckley in the year to 31 July 2016. Consequently nothing will be payable on
1 August 2016 under this part of the deal.

Page 1
(ii) The group accounting policy is to value any Non-Controlling Interests (NCI) at their fair value at the acquisition
date. On the date Mizzell acquired its interest in Buckley, the fair value of the NCI in Buckley was €120 million.

(iii) On 1 August 2014, the intangible assets held by Buckley had a fair value €25 million in excess of their carrying
value. These assets had a useful remaining economic life of 5 years at the date of acquisition.

(iv) Mizzell bought a 40% holding in the ordinary shares of Feeney on 1 August 2015, when the capital reserves of
Feeney were €20 million and the retained earnings balance in Feeney’s books stood at €65 million. The
consideration consisted of equity shares issued by Mizzell on a 2 for 5 basis. The fair value of Mizzell’s equity
shares on 1 August 2015 was €6.50 each. The share issue has not yet been recorded by Mizzell. Mizzell exerts
significant influence over Feeney as a result of this holding.

(v) During the financial year ended 31 July 2016, Buckley had sold goods to Mizzell amounting to €18 million. The
purchase price included a margin of 20%. Of these goods, one-third remained in the closing inventory of Mizzell
at the reporting date.

(vi) The amount carried under the heading “Obligations under finance leases” in the books of Mizzell consists of the
total obligation under finance leases correctly calculated under IAS 17 - Leases. However, on review, it has
become clear that €66 million in finance lease payments will be payable on 31 July 2017. The interest rate implicit
in the finance leases averages 10%.

(vii) No dividends were paid or proposed in the year to 31 July 2016 by any group company.

(viii) No impairment losses were deemed necessary at 31 July 2015 or 2016.

(ix) All workings may be rounded to the nearest €0.1m.

REQUIREMENT:

Prepare the Consolidated Statement of Financial Position for the Mizzell group as at 31 July 2016 in accordance
with International Financial Reporting Standards. (23 marks)
(a)

Format & Presentation (1 mark)

How would the initial calculation and subsequent treatment of goodwill arising on the acquisition of Buckley have
differed had the consolidated statement of financial position been prepared under FRS 102. You are not required
(b)

to redraft the statement in answer to this requirement. The cost of capital for the group can be taken to be 10%.

(6 marks)

[Total: 30 MARKS]

Page 2
2. The following draft Statement of Financial Position was drawn up as at 31 July 2016 on the instructions of the
directors of Bedrock Plc. On subsequent examination of the books and records the finance director has prepared
a list of issues which she believes may require amendments to the draft statement presented.

Bedrock Plc: Statement of Financial Position as at 31 July 2016


€ million

Land & buildings 420


Non-current assets:

Plant & equipment 600


Investment property 120
Equity investments 360
1,500

Inventory 80
Current assets:

Trade receivables 125


Cash & bank 30
235

Total assets: 1,735

Equity share capital 400


Equity:

Share premium 200


Retained earnings: Balance 1 August 2015 375
Profit for year 95
Dividend declared (30) 440

Other components of equity: Balance 1 August 2015 128


Other comprehensive income for year 35 163
1,203

Finance lease obligations 175


Non-current liabilities:

5% debenture 2020 150


325

Trade payables 110


Current liabilities:

Finance lease obligations 35


Provision for warranty claim 12
Corporation tax due 20
Final dividend due 30
207

Total equity & liabilities 1,735

The following notes are to be taken into account in so far as they are relevant:

(i) Land and buildings are carried after charging depreciation for the year. On 31 July 2016, a piece of property,
carried at €130 million, was revalued to €110 million. This revaluation has not been accounted for. The
revaluation reserve (included with other components of equity) had a balance of €12 million due to previous
revaluations of this property.

(ii) Plant and equipment are carried after charging depreciation for the year. A sale agreement was entered into
during July 2016 to sell some of this plant. The plant sold had a carrying value of €45 million at the date of sale
and was sold for an agreed price of €39 million. No cash has yet been received in respect of this sale, as a 30-
day credit period was agreed with the purchaser. No entry has been made to record this transaction.

(iii) The above figure for investment properties does not take account of the results of a fair valuation exercise carried
out on 31 July 2016. The result of this was that the investment properties had a fair value of €125 million at that
date. Bedrock Plc adopts the fair value model for investment properties.

Page 3
(iv) The equity investments had a fair value of €380 million at 31 July 2016, which has not yet been incorporated into
the financial statements. Bedrock has made an election to take all fair value gains and losses on equity
investments to “other comprehensive income” as permitted by IFRS 9 - Financial Instruments.

(v) The 5% debenture was issued on 1 August 2015 for cash proceeds of €150 million, and was correctly recorded.
The redemption terms of this debenture are such that the effective rate of interest to maturity was 6.5%. The only
other entry made in respect of the debenture was the payment of €7.5 million interest on the due date 31 July
2016.

(vi) Bedrock Plc offers a 12-month warranty on all goods sold to retail customers. A provision is maintained for the
expected cost of honouring this warranty. This has not been updated as at 31 July 2016. Bedrock sold 40,000
units of its relevant product during the year, all of which qualify for warranty. It expects 10% of these to need minor
repairs at an average cost of €500 each, and 3% to need major repair at a cost of €10,000 each. All costs are
expected to be incurred within 12 months.

(vii) Ignore the taxation effects of any adjustments you make.

REQUIREMENT:

(a) Prepare a schedule showing any corrections required to the profit and other comprehensive income for the year.

(8 marks)
Format & Presentation (1 mark)

Redraft the Statement of Financial Position at 31 July 2016 taking the above into account. (12 marks)
Format & Presentation (1 mark)
(b)

(c) Assess the key differences between operating leases and finance leases. (8 marks)

[Total: 30 MARKS]

Page 4
3. The following multiple-choice question contains eight sections, each of which is followed by a choice of
answers. Only one answer is correct in each case. Each question carries equal marks. On the answer
sheet provided indicate for each question, which of the options you think is the correct answer. Marks will
not be awarded where you select more than one answer for any question.

Record your answer to each section in the answer sheet provided.


REQUIREMENT:

1. Under IAS 8 - Accounting Policies, Changes in Accounting Estimates and Errors, which of the following are
considered changes of accounting policy?

(i) Changing the useful economic life estimate for a piece of plant.

(ii) Classifying depreciation on plant under ‘cost of sales’ in the Statement of Profit or Loss and Other
Comprehensive Income, having previously classified it under ‘administration expenses’.

(a) (i) only


(b) (ii) only
(c) Both (i) and (ii)
(d) Neither (i) nor (ii).

2. IAS 37 - Provisions, Contingent Liabilities and Contingent Assets requires a liability to be recognised in which of
the following situations?

(i) A detailed plan for a reorganisation has been agreed at board level, prior to the reporting date. This will
involve the future payment of €3 million in redundancy costs. No announcement of this reorganisation has
been made at the reporting date.

(ii) A customer was injured on the company’s premises prior to the reporting date, and has sued for €1 million.
Although the case has yet to come before the courts, legal advice has been received to the effect that the
company is likely to be found liable.

(a) (i) only


(b) (ii) only
(c) Both (i) and (ii)
(d) Neither (i) nor (ii).

3. Under IAS 2 - Inventories what should be the total carrying value of the items of inventory below?

Number of units in closing inventory 200 100


Item “A” Item “B”

Production cost per unit €15 €20


Expected selling price per unit €20 €28
Selling costs per unit €8 €3

(a) €5,000;
(b) €4,900;
(c) €4,400;
(d) None of the above.

4. On 1 August 2015 the following costs were incurred in connection with the purchase of an item of plant:
€ million
• Invoiced purchase cost of plant 17.5
• Delivery, installation and commissioning 1.8
• Decommissioning and disposal costs of old plant 0.5
• Redundancy payments to surplus staff as a result of new plant 2.0

Which of the following amounts should be capitalised under IAS 16 - Property, Plant and Equipment?

(a) €17.5 million


(b) €19.3 million
(c) €19.8 million
(d) €21.8 million
Page 5
5. gresham Plc bought a ten-year bond on 1 August 2015 at a cost of €45 million. The bond carries an interest
coupon of €4 million paid annually in arrears, and its effective yield to maturity was 12% at the date of purchase.
gresham is holding the bond as a speculative investment, expecting its value to increase, and hopes to sell the
bond at a profit in the short to medium term. On 31 July 2016, its reporting date, the fair value of the bond had
declined to €43 million. The interest payment was received as scheduled.

How much should be recognised in profit or loss as a result of the above, and what should be the carrying value
of the bond at the reporting date of 31 July 2016 under IFRS 9 - Financial Instruments?

(a) €5.4 million gain €46.4 million


Profit or Loss Carrying value

(b) €4 million gain €45 million


(c) €2 million gain €43 million
(d) €2 million loss €43 million

6. On 1 August 2015 the consolidated net assets of Fergal Plc included €35 million relating to a 100% owned
subsidiary, Kevin Plc. goodwill on the acquisition of Kevin was carried at €12 million in addition to this figure.
During the year ended 31 July 2016, Kevin Plc earned total comprehensive income of €6 million. On 31 January
2016, Fergal sold the entire share capital of Kevin for €45 million. Under IFRS 10 - Consolidated Financial
Statements how much is the consolidated gain or loss on disposal of the shares in Kevin? Ignore taxation and
assume results are generated evenly throughout the year.

(a) €8 million loss


(b) €5 million loss
(c) €2 million loss
(d) None of the above.

7. Ultan Plc entered into a finance lease on 1 August 2015 under which it agreed to make 4 annual payments of
€15 million in advance. The fair value of the plant leased, and the present value of the minimum lease payments
was €48.5 million and the useful economic life was 5 years. The interest rate implicit in the lease was 10%.

How much should be charged to Profit or Loss for year ended 31 July 2016 under IAS 17 - Leases (to one decimal
place)?

(a) €15.5 million


(b) €15.0 million
(c) €17.0 million
(d) None of the above.

8. On 1 August 2015 Charlie Plc, whose functional currency is the euro, bought a property in a foreign country for
US$40 million. The property had a 20-year useful economic life with no residual value estimated. On 31 July 2016
the property was revalued to US$45 million. Exchange rates were:

1 August 2015 €1 = US$ 1.25


31 July 2016 €1 = US$ 1.125

Under IAS 21-The Effects of Changes in Foreign Exchange Rates and IAS 16 - Property, Plant & Equipment how
much should be recognised within Profit or Loss and Other Comprehensive Income for year ended 31 July 2016?

Profit or Loss Other Comprehensive Income


(a) €2 million loss €5 million gain
(b) €1.6 million loss €8 million gain
(c) €1.6 million loss €9.6 million gain
(d) nil €8 million gain

[Total: 20 Marks]

Page 6
Answer either Question 4 or Question 5
IAS 33 - Earnings per Share sets out the requirements for calculating and disclosing the basic earnings per share
figure for quoted entities.
4.

The following figures appeared in the Consolidated Statement of Profit or Loss and Other Comprehensive Income
of Jakarta Plc for year ended 31 July 2016, together with comparatives for 2015:

€ million € million

Profit before taxation 400 300


2016 2015

Taxation on profit (75) (60)


Profit for the period 325 240
Other comprehensive income – revaluation gains on land 30 10
Total comprehensive income for the period 355 250

Profit for the year attributable to:


Owners of the parent 280 210
Non-controlling interests 45 30
Profit for the year 325 240

Total comprehensive income for the year attributable to:


Owners of the parent 310 220
Non-controlling interests 45 30
Total comprehensive income for the year 355 250

The following figures are taken from Jakarta’s Statement of Financial Position as 31 July 2016, together with
comparatives:
€ million € million

Equity share capital of €0.50 each 460 200


2016 2015

4% Preference shares – non-redeemable, non-cumulative 100 100


Share premium 215 60
Retained earnings 688 570
Other equity reserves 90 60
Non-controlling interests 85 40
Total equity 1,638 1,030

During the year ended 31 July 2016 the following changes took place to the issued share capital of Jakarta Plc:

(i) 100 million equity shares were issued in conjunction with the acquisition of another business. These were
issued at full market price at the date of issue, 1 November 2015.

(ii) 150 million ordinary shares were issued for cash to existing shareholders on 1 February 2016. The issue
price was €1.50 per share, which represented a discount of 25% on the traded price immediately before
the issue of (€2.00).

(iii) On 31 July 2016, a bonus issue of 270 million shares was completed, capitalising €135 million of retained
earnings. Also on this date the preference dividend due for the year, and an equity dividend of €23 million,
were paid.

REQUIREMENT:

Discuss the significance of the earnings per share (EPS) figure to the analysis of company performance. Why is
it important to have an accounting standard in this area?
(a)

(6 marks)

Applying the requirements of IAS 33 - Earnings Per Share to the information above, calculate the basic EPS for
year ended 31 July 2016 and the comparative figure for 2015 to be reported in the 2016 financial statements. The
(b)

EPS figure originally reported in 2015 was €0.525.


(14 marks)

[Total: 20 MARKS]
Page 7
OR

5. Under the IASB’s Conceptual Framework for Financial Reporting certain qualitative characteristics of useful
financial information are identified. These are subdivided into characteristics considered fundamental and those
considered to be enhancing. The two fundamental characteristics identified by the framework are ‘relevance’ and
‘faithful representation’. In order for financial transactions to be represented faithfully in the financial statements,
the principle of ‘substance over form’ should be applied. This means that wherever there is a difference between
the legal form of a transaction and its economic substance, the financial statements should reflect the economic
substance.

The following transactions were entered into by Rolojet Plc (Rolojet) during the year ended 31 July 2016:

(i) On 1 August 2015, Rolojet agreed to sell a plot of land to another entity for €5 million cash. The land had
a carrying value and a fair value at that date of €4 million. On the same date Rolojet entered into a binding
agreement with the same counterparty to repurchase the land on 1 August 2016 for €5.5 million cash.
(ii) On 1 July 2016, Rolojet delivered goods with an invoice value of €400,000 to a customer. The agreement
with the customer was that the goods would be paid for only if the customer sold them on. If they were not
sold by 31 August 2016, the customer could pay for them, or return them without penalty. Rolojet could
request the return of the goods at any time until the customer paid for them. The goods had cost Rolojet
€340,000 to manufacture. On 31 July 2016, none of the goods had been paid for by the customer, and
none returned.
(iii) On 10 July 2016, Rolojet delivered goods with an invoice value of €250,000 to another customer. The
agreement with this customer was that the goods would be paid for on sale to a third party or on 31 August
2016. However, in this case there was no right of return once the customer accepted delivery and was
satisfied the goods were as ordered and of good quality. The goods had cost Rolojet €160,000 to
manufacture. On 31 July 2016, none of the goods had been paid for by the customer.

REQUIREMENT:

Why it is considered important that the economic substance of a transaction be reflected in the financial
statements over its legal form?
(a)

(4 marks)

Describe in general terms the features of a transaction that suggest that its economic substance may differ from
its legal form.
(b)

(4 marks)

In the case of (i) to (iii) above, explain using journals, how the transactions should be accounted for under IFRS,
justifying for your answers. Assume no entries have already been made in respect of the above transactions.
(c)

(12 marks)

[Total: 20 MARKS]

END OF PAPER

Page 8
SUGGESTED SOLUTIONS

THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND

CORPORATE REPORTING
PROFESSIONAL 1 EXAMINATION – APRIL 2016

SOLUTION 1

Marking Scheme:

Basic consolidation (100% Mizzell + 100% Buckley) 3


Calculation and treatment of negative goodwill (including NCI at acquisition date) 3
(a)

Investment in associate calculation and subsequent movement 3


Fair value adjustments and post acq movements 2
Intra group sales of inventory 2
Calculation and movement of lease between current and non-current liabilities 3
Reserves calculation and consolidation - both 5
NCI calculation at reporting date 2
Presentation 1
Subtotal 24

Explanation and calculation of difference in initial calculation 4


Explanation and calculation of difference in treatment of negative goodwill 2
(b)

Subtotal 6

[Total: 30 Marks]

Page 9
SUGGESTED SOLUTION

group structure:
(a)

Mizzell owns 60 million shares out of 100m in Buckley. This gives 60% ownership in Buckley for 2 full years therefore
Buckley is a subsidiary. Note the equity shares are of €2 nominal value.
Mizzell has 40% ownership in Feeney for the full year and can exert significant influence. Therefore, Feeney is an
associate of Mizzell.

Mizzell plc: Consolidated statement of financial position of as at 31 July 2016


€ million

Property, plant and equipment (1,170 + 55) 1,225.0


Non current assets:

Intangible assets (268 + 120 +15 (W6) 403.0


Investment in Associate (W5) 50.4
Financial Assets (190 + 32 222.0
1,900.4

Inventories (220 + 142 - 1.2 (W7) 360.8


Current assets:

Trade receivables (330 + 79) 409.0


Cash & bank (140 + 49) 189.0
958.8

Total assets 2,859.2

Equity shares 1,190 + 16 (W5) 1,206.0


Equity:

Capital reserves (W3) 398.0


Retained earnings (W2) 414.7

2,018.7
Non-controlling interest (W4) 133.5
2,152.2

6% loan note 100.0


Non-current liabilities:

Contingent consideration (12 - 12 (W1) 0.0


Obligations under finance leases (243 - 60 (W8) 183.0

283.0

Trade payables (186 + 94) 280.0


Current liabilities:

Obligations under finance leases (W8) 60.0


Current taxation (46 + 38) 84.0
424.0

Total equity & liabilities 2,859.2

Page 10
W1
Calculation of goodwill on acquisition of Buckley € million

Consideration
Cash 155
Contingent consideration (fair value at acquisition date) 12
167
Value of NCI (note (iii)) 120

FV of net assets acquired


Equity share capital 200
Capital reserves 60
Retained earnings 40
Fair value adjustment – intangible assets 25
(325)
goodwill (38)
Credit to retained earnings 38
Balance 0

Note:
(1) Negative goodwill is credited entirely to group retained earnings as a gain on bargain purchase under IFRS
3.
(2) The contingent consideration is recognised at fair value at the acquisition date, and the fair value estimate is
updated annually through profit or loss. At 31 July 2016 is is clear that this will not be paid. Hence we will credit
retained earnings, and eliminate the liability from the books.

W2
Group retained earnings at 31 July 2016 Mizzell Buckley
€ million € million
Balance per SOFP (total at y/e) 358 65
Less balance at acquisition (note (i)) (40)
Elimination of negative goodwill (W1) 38
Elimination of contingent consideration (W1) 12
Share of loss of associate (W5) (1.6)
Amortisation of FVA intangible assets (W6) (10)
URP in inventory re intra-group sale of goods to Mizzell (W7) (1.2)
Adjusted reserves for consolidation 406.4 13.8
Consolidate Buckley (60% * 13.8) 8.3
group total 414.7

W3
Group capital reserves at 31 July 2016 Mizzell Buckley
€ million € million
Balance per SOFP (total at y/e) 350 80
Less balance at acquisition (note (i)) (60)
Share premium on shares issued to acquire Feeney (W5) 36
Adjusted reserves for consolidation 386 20
Consolidate Buckley (60% * 20) 12
group total 398

W4
Non-controlling interest at 31 July 2015 Buckley
€ million
Balance at acquisition (W1) 120
Share of post-acquisition retained earnings from W2 (40% * 13.8) 5.5
Share of post-acquisition capital reserves from W3 (40% * 20) 8
Total 133.5

Page 11
W5
Investment in Associate Feeney
€ million
Balance at acquisition (note (ii))
Equity shares issued (not recorded yet) 50 * 40% * 2/5 * €6.50 52
Share of post-acquisition retained earnings 40%*(61 - 65) (1.6)
Share of post acquisition capital reserves: 40% * (20 – 20) 0
Total 50.4

There are 50 million shares in Feeney (remember €2 nominal value!!), of which Mizzell purchased 40%, or 20
Tutorial note:

million. For these, Mizzell issued 2 of its own shares for every 5 acquired. Hence, Mizzell issued 8 million of its
shares. As these were not recorded, we must do so now. Share capital will be credited with €16 million (€2 per
share) and share premium with (52 – 16) €36 million.

As retained earnings declined since Mizzell’s purchase, it must take a charge for its share of the losses. This reduces
retained earnings and the value of the investment in the associate.

W6
Fair value adjustments (note (iii):

Intangible assets - Buckley €25m (€10m)** €15m


At acquisition Movement At rep. date

**Movement = amortisation of the adjustment for 2 full years since acquisition: €25m / 5 yrs * 2 yrs = €10m. This
is charged to the earnings of the company which holds (and therefore depreciates) the asset, namely Buckley.
Hence:

Dr Intangible assets €15.0m


Dr Retained earnings – Buckley €10.0m
Cr goodwill (FV net assets) €25.0m

W7

Unrealised profit (URP) on goods held in closing inventory:


Intra-group trading of goods (note (v))

€18 million * 20/100 * 1/3 (sold by Buckley therefore NCI IS affected) €1.2m
Adjustment to reduce reserves (Buckley) and Inventory:

Dr Retained Earnings (Buckley) €1.2m


Cr Inventory €1.2m

W8

Finance lease obligations due within 12 months must be classified as current liabilities rather than non-current
Reclassification of finance lease obligation (note (vi))

liabilities. Lease obligations are carried net of future interest charges. Hence the amount due on 31 July 2017 of
€66 million must be stated at its present value at 31 July 2016. This is 66 / (1.10) or €60 million. This amount
should be reclassified from non-current liabilities to current liabilities.

Page 12
(b) Under FRS 102 there are two differences in the calculation of goodwill is calculated in this question:

Firstly, goodwill is calculated under the partial method only.


Secondly, the contingent consideration is measured based on whether or not it is probable that the amount
will become payable. This is an “all or nothing” approach, as distinct to the IFRS approach of using the fair
value. The fair value would incorporate the probability that it may become payable.

If it is deemed probable, the entire amount is recognised, but discounted to reflect the time value of money.
This discount is unwound through profit or loss as time passes.

Hence, in relation to Buckley, the goodwill calculation would be as follows:

€ million
Consideration
Cash 155
Contingent consideration (present value at acquisition date = €22m / (1.1)2) 18.2

173.2

Value of NCI (€325m * 40%) 130

FV of net assets acquired


Equity share capital 200
Capital reserves 60
Retained earnings 40
Fair value adjustment – intangible assets 25
(325)
goodwill (21.8)

As the goodwill figure is negative, the following procedure applies:


1. Reassess the identification and measurement of Buckley’s identifiable net assets at acquisition;
2. Assuming no change is identified, show the negative goodwill on the face of the statement of financial
position immediately below the existing line for goodwill, as a negative asset;
3. Amortise this balance to profit or loss during the periods over which the non-monetary assets acquired
are recovered.

Page 13
SOLUTION 2

Marking Scheme:

Statement of corrected profit or loss and other comprehensive income


Transfer of figures from trial balance to appropriate headings 2
(a)

Capitalisation of overheads into buildings cost and exclusion from admin exp. 1
Capitalisation of interest into buildings cost and exclusion from finance costs 1
Depreciation on buildings (calculation and inclusion in expenses) 1
Depreciation on plant & equipment 1
Exclusion of sale or return goods from revenue 1
Inclusion of sale or return goods in closing inventory at cost price 1
Adjustment to admin expenses re warranty provision 1
Tax (calculation and recognition in P/L) 1
Preference dividend (calculation and inclusion in finance costs) 1
Presentation of gain on remeasurement of equity investments within OCI 1
Presentation 1
Subtotal 13

Statement of Financial Position


Transfer of figures from trial balance to appropriate headings 2
(b)

Correct capitalised amount for new building 1


Depreciation of plant & equipment 1
Depreciation of buildings 1
Elimination of sale or return goods from trade receivables 1
Inclusion of sale or return goods in inventory at cost 1
gain on equity investments (calculation and recognition in NCA) 1
Transfer of figures from SOCIE to reserves 1
Equity dividends proposed (calculation and inclusion in liabilities) 1
Tax (recognition as liability net of existing balance) 1
Preference dividends (calculation and recognition as liability) 1
Warranty provision (calculation and inclusion of correct amount in liabilities) 1
Presentation 1
Subtotal 14 - Max 12

Lease
3 key differences fully explained at 2 marks each 6
(c)

Subtotal 6

[Total: 30 Marks]

Page 14
SUGGESTED SOLUTION

(a) Schedule of changes to profit and OCI for the year

Profit for year OCI for year


€ million € million
Figures per draft financial statements 95 35
Revaluation of property W1 (8) (12)
Loss on disposal of plant W2 (6)
gain in fair value of investment properties W3 5
gain in fair value of equity investments W4 20
Additional finance cost W5 (2.25)
Additional warranty provision W6 (2)
Adjusted figures 81.75 43

(b) Redrafted statement of financial position

Bedrock plc: Statement of Financial Position as at 31 July 2016 (redrafted)

€ million

Land & buildings (420 – 20 W1) 400


Non-current assets:

Plant & equipment (600 – 45 W2) 555


Investment property (120 + 5 W3) 125
Equity investments (360 + 20 W4) 380
1,460

Inventory 80
Current assets:

Trade and other receivables (125 + 39 W2 164


Cash & bank 30
274
Total assets: 1,734

Equity share capital 400


Equity:

Share premium 200


Retained earnings: Balance 1 August 2015 375
Profit for year 81.75
Dividend declared (30) 426.75

Other components of equity: Balance 1 August 2015 128


Other comprehensive income for year 43 171
1,197.75

Finance lease obligations 175


Non-current liabilities:

5% debenture 2020 (150 + 2.25 W5) 152.25


327.25

Trade payables 110


Current liabilities:

Finance lease obligations 35


Provision for warranty claim (12 + 2 W6) 14
Corporation tax due 20
Final dividend due 30
209

Total equity & liabilities 1,734

Page 15
Workings:

This piece of property should be revalued downwards by €20 million (130-110). A downward revaluation in
W1 – Land & Buildings

an IAS 16 (Property Plant & Equipment) asset should be charged to the revaluation reserve (and OCI) to the
extent that a balance exists in that reserve relating to the same asset. Here, this amount is €12 million. Any
further revaluation loss should be charged to profit or loss. The extra €8 million of loss should be so charged.

This transaction should be recorded as a sale as the agreement has been made, and all significant economic
W2 – Plant & Equipment

risks and rewards associated with the plant have been transferred to the new owner. Hence a loss on disposal
of €6 million (39-45) will be recorded in profit or loss. €45 million will be derecognised from PPE, and a
receivable of €39 million recorded in current assets.

Under the fair value model of IAS 40, investment properties should be revalued to fair value at each reporting
W3 – Investment Properties

date. Any adjustment is recognised in profit or loss. Hence the fair value increase of €5 million (125 – 120)
should be shown in profit or loss as well as being reflected in the investment properties balance.

Under IFRS 9, equity investments should be classified as “Fair Value” financial instruments, and remeasured
W4 – Equity Investments

to fair value at each reporting date. Any resulting gains or losses are taken to profit or loss unless the entity
makes an irrevocable election to take them to OCI. This election has been made by Bedrock, hence the gain
in value of €20 million (380 – 360) should be taken to OCI as well as being reflected in the carrying value of
the equity investments.

Under IFRS 9 the amortised cost method is appropriate for this liability as there is no evidence to suggest the
W5 – Debenture

company is treating the liability as a trading instrument. Hence the annual finance charge should reflect the
effective rate to maturity rather than the coupon rate. The correct finance cost should therefore be €150m *
6.5% = €9.75 million instead of the recorded €7.5 million. The additional €2.25 million (9.75 – 7.5) should
be charged as a finance cost to profit or loss and accrued as an additional non-current liability.

The current liability for warranty provision needs to be updated at each reporting date to reflect best estimates
W6 – Warranty provision

available at that date. At 31 July 2016 best estimates suggest a provision of €14 million is required, calculated
as follows:

Minor repairs: (4,000 * €500) €2 million


Major repairs: (1,200 * €10,000) €12 million
€14 million

As the existing provision is recorded at €12 million, an additional charge of €2 million must be made to bring
the provision up to the required €14 million.

This should be charged to profit or loss, and added to the existing provision.

A finance lease is one that transfers substantially all the risks and rewards of ownership attaching to the
(c) Differences between operating and finance leases:

leased asset to the lessee. This is in substance considered equivalent to a purchase of the asset together
with a loan to finance the purchase. IAS 17 requires that such contracts be accounted for as if they were
purchases and loans, requiring the asset to be recognised in the books together with a corresponding loan
liability. The asset needs to be depreciated, and the liability amortised with interest charged in accordance
with the rate implicit in the agreement

An operating lease is any lease that does not meet the definition of a finance lease. This is essentially an asset
rental agreement in substance.

Several criteria are suggested by IAS 17 as useful to help judge whether a lease is or is not a finance lease.

Page 16
Some of these are:

• If the lease term is for substantially all the useful life of the asset, it is likely to be a finance lease.
• If the lease payments (at present value) amount to substantially all the fair value of the asset at
inception, it is likely to be a finance lease.
• If the asset is highly specialised, with little or no resale or aftermarket value, it is more likely to be a
finance lease.
• IF the terms of any secondary lease make it highly likely that it will be entered into, it is likely to be a
finance lease.
• If any buyout terms are highly attractive to the lessee this supports the argument that the lease is a
finance lease.

Page 17
Each correct mark gains 2.5 marks. No partial marks are awarded. Workings are not marked.
SOLUTION 3

Changing the useful economic life estimate is considered a change of estimate, not of policy.
1 Answer (b)

Changing the place of presentation of a number is considered a change of policy.


Hence, (ii) only is a change of accounting policy.

In order for a provision for reorganisation to be made a detailed formal plan must be drawn up AND this must
2. Answer (b)

be communicated to relevant parties. No announcement has been made in this case.


As the event causing the potential loss has occurred prior to the reporting date, the present obligation exists
at that date. A probable outflow of economic benefits will occur according to our legal advice. We also have
an estimate of the amount of loss.
Hence, (ii) causes the recognition of a provision, (i) does not.

Each item is assessed individually regarding its carrying value. The lower of cost or net realisable value is
3. Answer (c)

calculated, and the resulting amounts added. Net realisable value is calculated as the expected selling price
less expected costs of sale. Hence this is €12 per unit for item “A” and €25 per unit for item “B”. Item “A” is
valued at its NRV (200 * €12 = €2,400), whilst item “B” is valued at its cost (100 * €20 = €2,000). Total
valuation €4,400.

Any direct costs considered necessary to bring the new asset to the condition and location where it can be
4. Answer (b)

brought in to productive use should be capitalised. This includes delivery, installation and commissioning. It
does not include ancillary or consequential costs such as losses or costs of disposing of old plant, or
redundancy costs of surplus staff.

As the bond is not to be held to maturity it fails the “Business Model” test set out by IFRS 9 Financial
5. Answer (c)

Instruments. This means the amortised cost method cannot be used, and the fair value method must be used
instead. This results in a fair value loss of €2 million, and a carrying value of €43 million. The interest received
of €4 million is recognised as a gain in profit or loss. This results in a net gain of €2 million to profit or loss.

The gain or loss on disposal is calculated as the difference between the sale proceeds (€45 million) and the
6. Answer (b)

carrying value of the subsidiary in the group financial statements immediately prior to disposal. This carrying
value consists of opening net assets (€35 million) plus goodwill at carrying value (€12 million), plus total
comprehensive income recognised up to the date of sale (€6 million * 6/12), total €50 million. Hence a loss
of €5 million is recognised.

There are two charges to profit. (1) interest charged on the lease. This is calculated as 10% * (€48.5m -
7. Answer (a)

€15m) = €3.35 million. (2) depreciation on the leased asset. Calculated on a straight line basis over the
shorter of the lease term or the UEL of the asset. Here: €48.5m / 4 years = €12.125 million. Total charge
€15.475 million.

Under IAS 21 an asset purchased in foreign currency is translated into the functional currency of the entity
8. Answer (c)

at the date of purchase or revaluation and not restated otherwise. Hence there are two movements here:

Cost of property: US$40 million / 1.25 = €32 million


Depreciation for year: €32 million / 20 years = €1.6 million (charged to profit or loss)

Carrying value at year end: €30.4 million


Revalued amount: US$45 million / 1.125 = €40 million
Revaluation gain: (40m – 30.4m) = €9.6 million (credited to OCI)

Page 18
SOLUTION 4

Marking Scheme:

(a) 3 well developed points at 2 marks each


Subtotal 6

(b) Calculation of relevant earnings:

(1) Taking profit for the year (excluding OCI) 1


(2) Attributable to the parent (excluding non-controlling interest) 1
(3) Deducting preference dividend 1

Calculation of weighted average number of shares in issue

(1) Correct number of shares at beginning (allowing for €0.50 nominal value) 1
(2) Correct time weightings 1
(3) Inclusion of shares issued at full market value 1
(4) Calculation of TERP 1
(5) Calculation and correct application of rights issue bonus fraction 2
(6) Calculation and correct application of bonus issue bonus fraction 2
(7) Division of earnings by weighted average number of shares 1

Calculation of the restated 2015 EPS 2


Subtotal 14

[Total: 20 Marks]

SUGGESTED SOLUTION:

Earnings per share (EPS) is one of the most widely watched measures of company performance. As such it
(a) Significance of the earnings per share figure

is the measure that is subject to most intense efforts to maximise its level and its growth. It is superior to
other measures on many levels, but has some limitations also.

EPS gives a way to measure a company’s profits relative to the number of shares in issue. It is argued that
as owners hold equity shares, it is more relevant to them to know how much profit each share has earned
than to know the overall profit figure.

EPS feeds into the price / earnings ratio, one of the most important stock market measures of value. This gives
an estimate of the number of years it would take for an investment in an equity share to return itself in earnings
terms, assuming current performance continues into the future.

It is essential that such an important measure of performance have clear guidelines regarding its calculation.
IAS 33 Earnings per Share gives us a standardised method of calculating both earnings, and the number of
shares.

Many investors feel that other measures are more appropriate, and that the IAS 33 definition of EPS is too
conservative. IAS 33 allows alternative measures of EPS to be published, as long as the IAS 33 figure gets
equal or greater prominence.

There is a danger in relying on a single measure of performance, as no single measure can encapsulate all
aspects of an entity’s performance.

Also, there is a danger that EPS may be seen by unsophisticated investors as a definite exact number, when
in reality it is subject to all the accounting estimates and judgments that are necessary in preparing a set of
financial statements.

Despite these fears, it is generally agreed that IAS 33 gives a very fair method of calculating EPS, and that
the consistency it offers is of value to the investor and analyst. (6 marks)

Page 19
(b) Earnings relevant to 2016 EPS calculation:
€ million
Profit for the year (attributable to owners of the parent) 280
Less preference dividends (100 * 4%) (4)
IAS 33 earnings 276

Number of equity shares in issue (weighted average) for year ended 31 July 2016:

Date No. of Shares Time TERP Bonus Issue W. Av no.

1 Aug 2015 400 3/12 2 / 1.885 920/650 150.17


(m) weight weighting weighting of shares

1 Nov 2015 +100 = 500 3/12 2 / 1.885 920/650 187.72


1 Feb 2016 +150 = 650 6/12 920/650 460.00
31 July 2016 + 270 = 920 N/A
31 July 2016 Total 797.89

1 Feb 2016: rights issue at discount – calculation of Theoretical Ex-Rights Price (TERP)

No. of shares in issue prior to rights issue (m) 500 €2.00 €1,000
No. of shares issued during rights issue 150 €1.50 €225
Total no. of shares after rights issue 650 €1.885 €1,225

All shares in issue prior to the rights issue are weighted by a bonus fraction equal to the ex-rights price (prior
to the rights issue) divided by the TERP (2.00 / 1.885).

31 July 2016: Bonus issue – calculation of bonus fraction


No. of shares in issue prior to bonus issue 650
No. of shares in issue after bonus issue 920
Bonus fraction = 920 / 650

Weighted average number of shares in issue for year ended 31 July 2016 = 797.89 million

Basic EPS: 276 / 797.89


€0.3459

Previous years’ EPS figures need to be restated to reflect the distorting effect of issues of shares below
market value. This is achieved by multiplying the previously calculated EPY by the inverse of the bonus
fractions.

2015 EPS restated: €0.525 * 1.885/2 * 650/920


€0.3496
(14 marks)

[Total: 20 MARKS]

Page 20
SOLUTION 5

Marking Scheme:

2 well developed points at 2 marks each


Subtotal 4
(a)

2 well developed points at 2 marks each


Subtotal 4
(b)

3 parts at 4 marks each


Subtotal 12
(c)

[Total: 20 Marks]

Suggested solution:

It has been one of the failures of accounting regulation over the years that creative means of circumventing
well-meaning rules have been found. The result of such efforts have been the undermining of faith in the
(a)

ability of financial statements to reflect faithfully the truth and fairness of the performance and financial position
of the reporting entity.

It has become clear that any hard rule can be creatively circumvented by contriving transactions appropriately.
This is because transactions are necessarily structured between parties as they wish, and to suit their
business needs. Regulators cannot anticipate the needs of transacting parties, and rules by their nature
always lag behind the transactions themselves. In other words, as regulators see a transaction that is not
covered by the existing rules, they seek to “plug the gap”. This is not a satisfactory way to ensure that financial
statements reflect truth and fairness.

Since the 1990s, regulators have sought to implement a principles-based set of standards. These place the
truth and fairness objective above any single rule. Indeed they require that rules be departed from if they do
not result in a fair presentation of a transaction.

One of these key principles is “Substance over Form”. If a transaction is structured in such a way that the
economic reality (substance) differs from the legal form of the transaction, the accounting must reflect the
economic substance.
(4 marks)

(b) Features indicating that the substance of a transaction may differ from its legal form:

There are some key tell-tale indicators that should alert the accountant to the possibility that substance and
form issues may exist. Some of these are:

• If two or more transactions are executed together, and the combined effect of both taken together is
different from the effect of each individually, this is worth investigating. For example a sale transaction
selling an asset (possibly at a price in excess of market) and an agreement to lease back that same
asset (possibly at an inflated rental).
• Business arrangements entered into which seem to disproportionately advantage one party over
another. There is nothing legally wrong with entering into an arrangement that is not in your best
interests, but rational businesspeople tend not to do so unless there is a benefit elsewhere.
• Contrived option arrangements that serve to divert risk from where it might otherwise lie.
• Unusual terms in business agreements, that might affect our assessment of the timing of revenues
and costs.
• Transactions may be structured to manipulate the reported results, for example by misreporting
expenses as assets, or liabilities as revenue.
(6 marks)

Page 21
This transaction shows two characteristics suggesting the commercial substance may be different from its
(c)

legal form. On the surface, there is a sale agreement showing the sale of a plot of land at a price higher than
(i)

fair value. A shrewd decision one might conclude. However when one takes the two transactions together, we
see that the benefit of this sale is not permanent. Rolojet has committed to buying back the land at an even
higher price in 1 year’s time.

This suggests that Rolojet has not transferred the risks and rewards of ownership of the land, as it will (under
a binding agreement) reacquire them at a predetermined price. This is suggestive of a loan with interest,
secured on the land. Why otherwise would the counterparty enter into the arrangement? What’s in it for them
except a fixed return of 10%? The other party has no opportunity to benefit or suffer from the economic value
or risks embodied by the land.

Hence:
The land is not derecognised.
Cash received of €5 million is recognised on receipt, as is the obligation to repay this amount within 1 year.
As the year progresses, finance cost of €0.5 million is accrued on a time-weighted basis.

Journal:
1 August 2015 Dr Cash €5.0 million
Cr Loan obligation €5.0 million

During the year Dr Profit or Loss €0.5 million


Cr Loan obligation €0.5 million

(4 marks)

This transaction shows a sale-or-return agreement. Under this agreement Rolojet cannot be said to have
transferred the risks and rewards of the goods to its customer. The substance of the arrangement is that the
(ii)

goods are lent to the customer, who can return them at any time until sold on. Likewise, Rolojet has the right
to require return. Hence risks and rewards are retained.

The goods should not be recorded as a sale, and no trade receivable recognised. Rather, they should be
recorded as closing inventory, as cost price of €340,000.

Journal:
31 July 2016 Dr Inventory €340,000
Cr Cost of Sales €340,000

(4 marks)

This situation differs from the one in part (ii) because the risk taken on by the customer is greater. The
customer has no right to return the goods (other than the normal legal right to return them if faulty). The only
(iii)

risk retained by Rolojet is credit risk. Credit risk does not prevent recognition of a sale under normal
circumstances. Hence the goods should be recorded as a sale and a trade receivable recognised for the
agreed price.

Journal:
10 July 2016 Dr Trade receivables €250,000
Cr Revenue €250,000

(4 marks)

[Total: 20 MARKS]

Page 22
CORPORATE REPORTING
PROFESSIONAL 1 EXAMINATION - APRIL 2017

NOTES:
You are required to answer Questions 1, 2 and 3. You are also required to answer either Question 4 or 5.
Should you provide answers to both Questions 4 and 5, you must draw a clearly distinguishable line through
the answer not to be marked. Otherwise, only the first answer to hand for Question 4 or 5 will be marked.

Note: You have optional use of the Extended Trial


Balance, which if used, must be included in the answer booklet.

Provided are pro-forma:

Statements of Profit or Loss and Other Comprehensive Income By Expense, Statements of Profit or Loss
and Other Comprehensive Income By Function, and Statements of Financial Position.

TIME ALLOWED:
3.5 hours, plus 10 minutes to read the paper.

INSTRUCTIONS:
During the reading time you may write notes on the examination paper, but you may not commence
writing in your answer book. Please read each Question carefully.

Marks for each question are shown. The pass mark required is 50% in total over the whole paper.

Start your answer to each question on a new page.

You are reminded to pay particular attention to your communication skills, and care must be taken
regarding the format and literacy of your solutions. The marking system will take into account the
content of your answers and the extent to which answers are supported with relevant legislation, case
law or examples, where appropriate.

List on the cover of each answer booklet, in the space provided, the number of each question
attempted.

NB: PLEASE ENSURE TO ENCLOSE YOUR ANSWER SHEET TO QUESTION 3 IN THE


ENVELOPE PROVIDED.

The Institute of Certified Public Accountants in Ireland, 17 Harcourt Street, Dublin 2.


CORPORATE REPORTING
THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND

PROFESSIONAL 1 EXAMINATION – APRIL 2017

You are required to answer Questions 1, 2 and 3. You are also required to answer either Question 4 or 5.
Time allowed: 3.5 hours, plus 10 minutes to read the paper.

Should you provide answers to both Questions 4 and 5, you must draw a clearly distinguishable line through the
answer not to be marked. Otherwise, only the first answer to hand for Question 4 or 5 will be marked.
You are required to answer Questions 1, 2 and 3.
1. The following Statements of Profit or Loss and Other Comprehensive Income relate to Kildome Plc (Kildome) and
its investee companies, Milhouse Plc (Milhouse) and Flanders Plc (Flanders).

Statements of Profit or Loss and Other Comprehensive Income for year ended 31 March 2017

Kildome Plc Milhouse Plc Flanders Plc


€ ‘000 € ‘000 € ‘000
Revenue 3,500 760 900
Cost of Sales (2,000) (320) (300)
Gross profit 1,500 440 600

Operating expenses (210) (160) (240)


Finance costs (30) (20) (40)
Other income 20 - 80
Profit before taxation 1,280 260 400

Taxation (150) (60) (40)


Profit for the year 1,130 200 360

Other comprehensive income


(amounts that will not be reclassified to profit or loss)
Gains on revaluations of property 60 - -
Total comprehensive income for the year 1,190 200 360

The following additional information is provided:

(i) Kildome bought a 70% holding in the voting equity of Milhouse on 1 July 2016. The purchase price of the
investment was agreed at €2.5 million. The 30% non-controlling interest in Milhouse had a fair value of €1 million
at that date. Milhouse’s identifiable net assets had a fair value of €3 million on 1 July 2016. It was decided to apply
the fair value method to calculate goodwill on acquisition, as permitted by IFRS 3 - Business Combinations.
(ii) Kildome purchased 30% of the voting equity of Flanders on 1 October 2016. Kildome exerts significant influence
over Flanders because of this investment.
(iii) Goodwill of Milhouse was reviewed for impairment at 31 March 2017 and was found to have suffered an
impairment loss of €30,000. The 30% investment in Flanders was reviewed for impairment at 31 March 2017 and
found to have suffered an impairment of €25,000.
(iv) Included in Milhouse’s net assets on the acquisition date was some machinery with a fair value of €48,000 above
its carrying amount. The useful economic life of this machinery at the acquisition date was estimated to be six
years. The fair value adjustment has been considered in arriving at the €3 million referred to in note (i), but has
not been incorporated into the books of Milhouse.
(v) During the year ended 31 March 2017 Kildome sold goods to Milhouse totalling €36,000. These goods were sold
by Kildome at a mark-up of 20% on cost price. The goods were traded evenly throughout the year. €6,000 worth
of inventory (at cost to Milhouse) was held by Milhouse at 31 March 2017. These goods were supplied in February
and March 2017.
(vi) Since acquisition, Kildome has managed the administration of the entire group. Kildome invoiced Milhouse
€10,000 for its share of these costs. Kildome recorded this transaction within “other income”, and Milhouse within
“operating expenses”.
(vii) On 1 February 2017, Flanders sold some land to Kildome for €200,000, recording a profit of €80,000. This profit
is included within “other income” in the books of Flanders. Assume this transaction had no taxation impact.

Page 1
(viii) Kildome has a policy of revaluing property to fair value as permitted under the revaluation model of IAS 16. Neither
Milhouse nor Flanders adopts the revaluation model of IAS 16 - Property, Plant and Equipment, instead choosing
the cost model. If they had adopted the revaluation model, Milhouse would have recorded revaluation gains of
€15,000 at 31 March 2017. No revaluations would have been necessary prior to its acquisition.
(ix) Assume all expenses and gains accrue evenly throughout the year unless otherwise instructed.

REQUIREMENT:

(a) Calculate the goodwill arising on the acquisition of Milhouse in accordance with IFRS 3. Calculate the goodwill
amount that should appear in the Consolidated Statement of Financial Position of Kildome at 31 March 2017.

(3 marks)

(b) Calculate the goodwill figure that would have been recorded on acquisition of Milhouse had FRS 102 - The
Financial Reporting Standard Applicable in the UK and Republic of Ireland been used to calculate this instead of
IFRS 3. Assume for the purposes of this requirement that the useful economic life of goodwill cannot be
determined.
(3 marks)

(c) Prepare a consolidated Statement of Profit or Loss and Other Comprehensive Income for the Kildome Group for
year ended 31 March 2017 in accordance with IFRS.
(22 marks)

Presentation marks (2 marks)

[Total: 30 Marks]

Page 2
2. Leonard Plc is an importer and wholesaler of mobile phone accessories and related goods. Its summarised
financial statements for the year ended 31 March 2017 (and 2016 comparatives) are as follows:

Statements of Profit or Loss and Other Comprehensive Income for the years ended 31 March:

2017 2016
€ million € million
Revenue 275 150
Cost of sales (100) (30)
Gross profit 175 120
Operating costs (50) (30)
Investment income 12 12
Finance costs (50) (15)
Profit (loss) before taxation 87 87
Income tax expense (10) (10)
Profit for the year 77 77

Other comprehensive income


(amounts that will not be reclassified to profit or loss):

Fair value gains on equity investments 30 5


Revaluation losses on property plant & equipment (45) -
Total comprehensive income (loss) for the year 62 82

Statements of Financial Position as at 31 March:


2017 2016
€ million € million
Assets
Non-current assets:
Property, plant and equipment 1,198 677
Intangible asset – franchise 20 -
Equity investments designated “fair value through OCI” 170 140
1,388 817
Current assets
Inventory 40 19
Trade receivables 52 28
Bank 40 10
132 57

Total assets 1,520 874

Equity and liabilities


Equity:
Equity shares of €1 each 180 120
Share premium 60 --
Other components of equity 40 55
Retained earnings 400 350
680 525
Non-current liabilities:
Bank loan 750 300

Current liabilities:
Trade payables 30 9
Other accruals 50 30
Current tax payable 10 10
90 49

Total equity and liabilities 1,520 874

Page 3
On 1 April 2016, the directors of Leonard Plc decided to expand the business by purchasing a franchise to import and
distribute additional lines of products. The franchise cost €25 million and had a five-year life. However, it can be renewed
at an additional fee, subject to satisfactory performance.

The new business required significant investment in warehouses and distribution vehicles. To finance this expansion,
additional shares were issued and the existing bank loan was replaced by a bigger one. The bank charged a higher
interest rate on the new loan due to the higher gearing ratio that resulted from the increased debt level. The new capital
was raised on 1 April 2016, and the loan is repayable on 31 March 2022.

During a board meeting held to review the year’s performance, some of the directors expressed dissatisfaction with the
financial results, noting that despite significantly increased revenue, profit for the year posted zero growth, and total
comprehensive income decreased by €20 million.

The finance director agreed that there was a disappointing outcome for the year ended March 2017. He presented some
information that he felt might be helpful in analysing the cause of the poor results and likely trends in the future
performance of the business. He also made the following points:

• In the year ended 31 March 2017 the pre-existing product lines (which excluded the expansion) reported revenue
of €175 million, cost of sales of €33 million and operating expenses of €28 million.
• There had been production problems with the manufacturer of some of the new products, leading to a shortage
of supply. Leonard Plc had to source product from another supplier at a higher cost to meet contractually agreed
deliveries. This added €22 million to cost of sales in the period. These problems have now been resolved and are
not expected to recur.
• Dividends of €0.15 per share were paid on 31 March 2017, in accordance with a previous board decision. This
was the same amount per share as the previous year.

REQUIREMENT:
Produce a report to review the concerns of the dissatisfied directors using appropriate ratios and the information above.
Your report should make recommendations, where appropriate, to address these concerns.

[Total: 30 Marks]

Page 4
3. The following multiple-choice question contains 8 sections, each of which is followed by a choice of
answers. Only one of the answers offered is correct. Each question carries 2.5 marks. Provide your
answer to each section on the answer sheet provided.

REQUIREMENT:
Provide your answer to each section in the answer sheet provided.

1. On 1 April 2016, Pear Plc entered a three-year finance lease agreement to purchase a vehicle. The vehicle had
a cash purchase price of €40,000. The lease required an upfront payment of €10,000, and three annual
payments on 31 March 2017, 2018 and 2019 of €12,063.45. The implicit rate of interest is 10% per annum.

What amount should be presented as the current liability for finance lease obligation at 31 March 2017?

(a) €20,936.55
(b) €12,063.45
(c) €10,966.76
(d) €9,969.80

2. One of the fundamental qualitative characteristics of financial information identified by the Conceptual Framework
is “Faithful Representation”. This means that financial reporting must represent faithfully the effect of transactions
which occurred during the period on the entity’s assets, liabilities, expenses and gains. Which one of the following
statements best represents a true example of faithful representation?

(a) Reporting redeemable preference shares as a liability in the statement of financial position.
(b) Reporting finance lease payments as expenses in profit or loss.
(c) Adopting the revaluation model of IAS 16 Property plant & equipment, and applying it selectively to certain
assets in a class, and not to others.
(d) Recording inventory at net realisable value in all cases.

3. On 1 April 2016, Peach Plc purchased a goldmine, and commenced mining operations. A condition of the mining
licence is that the site be restored on completion of mining operations. This is estimated to cost €30 million in 8
years. The present value of €30 million on 1 April 2016 is €16.21 million, using a discount rate of 8%. What should
be the carrying value of the provision at 31 March 2017 under IAS 37 Provisions, Contingent Liabilities and
Contingent Assets?

(a) €17.51 million


(b) €16.21 million
(c) €3.75 million
(d) €2.03 million

4. Melon Plc is an Irish company whose functional currency is the Euro. On 31 January 2017, it sold goods to a UK
customer at an agreed price of GB£25,000. At the reporting date 31 March 2017, the balance remained payable.
The relevant exchange rates were as follows:

31 Jan 2017: €1 = GB£0.89


31 March 2017: €1 = GB£0.85

Ignoring the time value of money, what is the amount of exchange gain or loss that would appear in the financial
statements of Melon Plc for year ended 31 March 2017 based on the above transaction?

(a) €1,321 loss


(b) €1,321 gain
(c) €1,000 loss
(d) €1,000 gain

Page 5
5. Pineapple Plc bought 70% of the equity shares in Kiwi Plc in 2010, paying a total of €40 million. Goodwill arising
on the acquisition was €6 million. On 31 March 2017, Pineapple Plc sold its entire holding in Kiwi Plc for €86
million. The carrying values relevant to Kiwi in the consolidated financial statements at that date were as follows:

Identifiable net assets €103 million


Goodwill €6 million
Non-controlling interest €31 million

How much should be recognised in consolidated profit or loss with respect to the gain or loss on disposal of Kiwi?

(a) €46 million


(b) €9.7 million
(c) €8.0 million
(d) €15 million

6. Grape Plc bought 40% of the equity shares of Plum Plc on 1 April 2016, at a cost of €6.2 million. Grape Plc exerts
significant influence over the management of Plum Plc. During the year ended 31 March 2017 Plum Plc reported
profit for the year of €2.5 million and other comprehensive income of €500,000. The investment in Plum had a
fair value of €7.9 million at 31 March 2017.

What should be the carrying value of the investment in Plum Plc in the consolidated financial statements of Grape
Plc on 31 March 2017?

(a) €7.4 million


(b) €6.2 million
(c) €7.9 million
(d) €9.2 million

7. Orange Plc provides the following information in respect of the year ended 31 March 2017:

• Profit before taxation was €30 million.


• Depreciation charged to expenses was €6 million.
• A provision for resolution of a compensation claim of €3 million made in a previous year was released.
• Inventory decreased by €1.6 million.
• Trade payables increased by €2.2 million.

What is the cash generated from operations based on the above information?

(a) €33.6 million


(b) €42.8 million
(c) €36.8 million
(d) €29.2 million

8. The following figures appear in the inventory records of Lemon Plc on 31 March 2017.
Item Quantity Cost per unit in € Net Realisable Value per unit in €
A45116 50 units 30 42
A92310 75 units 40 35

Under IAS 2 Inventory, what figure should be reported as inventory in current assets in the statement of financial
position as at 31 March 2017?

(a) €4,500
(b) €4,725
(c) €4,125
(d) €5,100
[Total: 20 Marks]

Page 6
Answer either Question 4 or Question 5
4. IAS 10 Events After the Reporting Period sets out guidance for dealing with events which occur after the reporting
date but which may have implications for the financial statements up to the reporting date. It distinguishes
between adjusting events and non-adjusting events.

Geordie Plc is in the process of finalising its financial statements for year ended 31 March 2017. The draft
statements were completed on 14 April 2017, and the audit is currently in progress. The financial statements are
expected to be approved by the board of directors on 15 May 2017, and published on 20 May 2017. The following
matters have come to light during the audit and your advice is requested. No adjustment has yet been made for
any of the following.

(i) Closing inventory at 31 March 2017 includes 100 items carried at cost €5,000 each. New safety regulations
were announced on 5 April 2017 with immediate effect. The items of inventory do not comply with these
regulations. As a result, the net realisable value of the inventory is only €4,500 each.

(ii) An investment in unquoted equity instruments was held by Geordie Plc at 31 March 2017 at an amount of
€3.5 million. This was its fair value on 30 September 2016, the most recent reporting date. Due to the
unavailability of professional valuers, an updated fair value was not available until 15 April 2017. On this
date, the valuer provided an estimate of fair value of €2.8 million.

(iii) Geordie Plc was being sued on 31 March 2017. At that date the case had been heard, but the judgment
was only handed down on 20 April 2017. The outcome was that Geordie was found liable for damages and
costs totalling €3.1 million. On 21 April 2017, Geordie filed a claim with its insurers and on 28 April 2017,
was notified that the insurer would cover €2.6 million of the loss.

(iv) On 30 March 2017, Geordie paid €500 for a raffle ticket to support a local charity. On 3 April 2017, the
company was notified that it had won first prize of €100,000. The draw took place on 31 March 2017.

REQUIREMENT:

(a) Discuss the concepts of “adjusting” and “non-adjusting” events as defined by IAS 10 Events After the Reporting
Period, and explain the accounting treatment and disclosures required in each case.
(8 marks)

(b) In each case (i) to (iv) above, prepare a briefing note advising on the accounting treatment and / or disclosures
required as a result of the event(s) after the reporting date.
(12 marks)

[Total: 20 Marks]

OR

Page 7
5. IAS 16 Property Plant and Equipment sets out the accounting requirements for initial recognition and
measurement, subsequent measurement and derecognition of items of property, plant and equipment. IAS 16
expands on and applies the definition of an asset in the Conceptual Framework, as well as the recognition criteria
set out in that document.

On 31 December 2016, Stanley Plc completed the construction of a new headquarters building. Some costs
associated with this were as follows:

€’000
Purchase of site 200
Legal costs and stamp duty on site purchase 16
Demolition of existing derelict building on site 18
Design and planning costs 49
Redesign costs due to conditions of planning permission 15
Redesign costs due to errors in the original design 12
Tendering and procurement costs 5
Management time spent on the above, estimated apportionment 22
Construction contractor’s fee to builder’s finish 754
Rectification costs due to contractor error, not covered by the contractor 13
Completion, painting and furnishing 113
Cost of moving in staff, files and equipment 37
Cancellation costs of operating lease on previous headquarters building 31

The new building was brought into use on 1 January 2017. It was estimated to have a useful economic life of 50
years from that date, and a residual value of €140,000 at the end of its life (excluding the land).

All the above costs were debited to a suspense account and credited to cash. No other entries were made. All
items were paid as incurred.

REQUIREMENT:

(a) Outline how a newly constructed building should be recorded in the financial records applying the principles of
IAS 16 Property Plant and Equipment.
(4 marks)

(b) Recommend how further expenditure on an existing building should be treated under IAS 16 Property Plant and
Equipment?
(4 marks)

(c) Set out journal entries and supporting calculations to show how the principles of IAS 16 Property Plant and
Equipment should be applied in accounting for the transactions described above for year ended 31 March 2017.

(12 marks)

[Total: 20 Marks]

END OF PAPER

Page 8
SUGGESTED SOLUTIONS

CORPORATE REPORTING
THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND

PROFESSIONAL 1 EXAMINATION – APRIL 2017

SOLUTION 1

Marking Scheme:

(a) Goodwill under IFRS


Calculation of goodwill on acquisition 2
Treatment of impairment loss 1
Subtotal 3

(b) Goodwill under FRS 102


Calculation of goodwill on acquisition 2
Calculation and treatment of amortisation 1
Subtotal 3

(b) Statement
Basic consolidation plan (100% Kildome + 100% Milhouse * 9/12) 4
Goodwill impairment (inclusion in expenses) 1
Depreciation on FVA (calculation and inclusion in expenses) 2
Intra-group revenue and purchases (exclusion) 2
Unrealised profit on intra-group trading (calculation and elimination) 2
Administration cost (exclusion from both headings) 2
Calculation and recognition of share of results of associate (incl adjustments) 4
Calculation and attribution of results to NCI and owners of parent 4
Inclusion of Milhouse’s revaluation gain in OCI 1
Presentation 2
Subtotal 24

[Total: 30 Marks]

SUGGESTED SOLUTION

(a) Calculation of goodwill on acquisition of Milhouse under IFRS: €’000 €’000


Cost of investment 2,500
Fair value of NCI 1,000
Fair value of net assets at acquisition (3,000)
Goodwill 500
Impairment loss 31 March 2017 (30)
Recoverable amount 31 March 2017 (to SOFP) 470

(b) Calculation of goodwill on acquisition of Milhouse under FRS 102: €’000 €’000
Cost of investment 2,500
Value of NCI (3,000 * 30%) Note (i) 900
Fair value of net assets at acquisition (3,000)
Goodwill 400
Amortisation to 31 March 2017 Note (ii) (80)
Balance 31 March 2017 (to SOFP) 320

Note (i): FRS 102 requires the use of the partial method, and does not permit use of the fair value method.
Note (ii): FRS 102 requires annual impairment over the useful economic life of goodwill. If the useful economic
life cannot be determined, the life may not exceed five years.

(c) Kildome plc: Consolidated Statement of Profit or Loss and Other Comprehensive Income
Page 9
for year ended 31 March 2017
(100% Kildome + 100% Milhouse * 9/12) € ‘000
Revenue 3,500 + (760 * 9/12) -27 (vi) 4,043
Cost of Sales 2,000 + (320 * 9/12) +6 (v) -27 + 1 (vi) (2,220)
Gross Profit 1,823
Operating expenses 210 + (160 * 9/12) + 30(iii) -10 (vii) (350)
Finance costs 30 + (20 * 9/12) (45)
Other income 20 -10 (vii) 10
Share of profit for year of associate Working (iv) 17
Profit before taxation 1,455
Taxation (150 + (60 * 9/12)) (195)
Profit for the year 1,260

Other comprehensive income (Amounts that will not be reclassified to profit or loss)
Gains on revaluation of property (60 + 15 (viii) 75
Total comprehensive income for the year 1,335

Profit for the year attributable to:


Owners of the parent (balancing figure 1,260 – 49.2) 1,225.8
Non-controlling interest (ii) 34.2
1,260.0
Total comprehensive income for the year attributable to:
Owners of the parent (balancing figure 1,335 – 53.7) 1,296.3
Non-controlling interest (ii) 38.7
1,335.0

Working (i): Group structure:


Kildome plc – Parent

Milhouse plc – 70% ownership interest acquired by Kildome 3 months into the financial year. Hence Milhouse
is a subsidiary of Kildome for 9 months of year. Therefore, include 100% of results, time apportioned by 9/12.
NCI = 30%.

Flanders plc – 30% ownership interest acquired by Kildome 6 months into the financial year, significant
influence exerted. Therefore, Flanders is an associate of the group. Include as single-line adjustments 30%
of profit for year, and 30% of other comprehensive income, time apportioned by 6/12.

Working (ii) – non-controlling interest Profit €’000 TCI €’000


Milhouse total per SPLOCI given * 9/12 150 150
Less Goodwill impairment loss (iii) (30) (30)
Less adjustment for depreciation on FVA (v) (6) (6)
Add revaluation gains - Milhouse - 15
Adjusted figures 114 129
NCI percentage 30% 30%
NCI amount 34.2 38.7

Working (iii) – goodwill impairment


Impairment loss on consolidated goodwill €30,000 included as operating expense in year of recognition. NCI
is affected as the fair value method was used to calculate goodwill.

Note: Goodwill may be included in cost of sales for full credit.

Working (iv) – Share of results of associate


Profit for year generated by associate €360,000
Profit on sale of land included above (note (vii) - occurred on 1 February 2017) (80,000)
Profit generated across the year 280,000

Kildome’s share of profit for year of associate = 280 * 30% * 6/12 = €42,000

Page 10
Kildone’s share of profit on sale of land (80 * 30%) 24,000
Eliminated due to inter-company trading (80 * 30%) (24,000)
Impairment loss this year in investment in associate (note (iii)) (25,000)
Net income recognized from associate 17,000
NCI is not affected as the associate is owned by the parent.

Tutorial note:
The profit on the sale of land by the associate has two complications:

(1) It occurred during the period Kildome had significant influence. Hence it is not appropriate to time-
apportion this gain. It did not accrue evenly over the year.
(2) The gain arises on the sale of the land to Kildome. Hence from a group perspective this gain is
unrealized. As normal we eliminate the group’s share (30%) of any unrealized gains or losses on trading
with an associate. Hence the recognition and elimination cancel each other out (boxed section above).

Working (v) – Fair value adjustment consequences


Additional depreciation not yet charged re fair value adjustment:
€48,000 / 6 years * 9/12 = €6,000
Add to cost of sales expense this year.
NCI is affected as it is Milhouse’s asset that is being adjusted.

Working (vi) – intra-group trading


Eliminate the portion intra-group sales and purchases that occurred since acquisition (€36,000 * 9/12 =
€27,000) in full from group revenue and group cost of sales.

Unrealised profit provision required = €6,000 * 20/120 = €1,000


Increase Cost of Sales with this amount.

NCI is not affected as Kildome (parent) was the internal selling company that recorded the gain.

Working (vii) – intra-group administration expenses


Eliminate intragroup income and expenses €10,000 from other income and operating expenses.

Working (viii) – harmonization of accounting policies


Add €15,000 to Milhouse’s OCI
NCI will share in this gain also.

Tutorial Note:
It is important that all companies being consolidated adopt consistent accounting policies. Hence we must
make adjustment to OCI to recognise the revaluation gains of Milhouse. As these gains all occurred after the
acquisition date, time apportionment is not applied.

SOLUTION 2

Page 11
Marking Scheme:

Report
Analysis at appropriate depth (maximum of 12 marks for ratio calculation) [Total: 30 Marks]

Ratio calculation

y/e 31 March 2016 y/e 31 March 2017 2017 adjusted


Gross margin 120/150 = 80% 175/275 = 63.6% (175+22)/275 = 71.6%
Net margin 102/150 = 68% 137/275 = 49.8% (137+22)/275 = 57.8%
ROCE 102/(525+300) = 12.4% 137/(750+680) = 9.6% (137+22)/(750+680) = 11.1%
ROE 77/525 = 14.7% 77/680 = 11.3% (77+22-2.5)/680 = 14.2%
Current ratio 57:49 = 1.16:1 132:90 = 1.47:1 n/a (no change)
Acid Test (57-19):49 = 0.78:1 (132-40):90 = 1.02:1 n/a
Inventory days 19/30*365 = 231 days 40/100*365 = 146 40/(100-22)/365 = 187
Receivables days 28/150 * 365 = 68 days 52/275 * 365 = 69 n/a
Payables days 9/30*365 = 109 days 30/100*365 = 109 30/(100-22)*365 = 140
Gearing Ratio 300/525 = 57% 750/680 = 110% 750/(680+22-2.5) = 107%

Report:
To: Directors of Leonard plc
From: P. Frogger, Accountant
Re: Analysis of performance of Leonard plc for year ended 31 March 2017.
Date: 30 April 2017.

Dear Directors,
I am pleased to present to you my report into the performance of your company for the past year. I have taken the
liberty of making comparisons with the previous year, and tentative projections, based on information provided by
yourselves.

I will address performance under the following headings, which are customary for this type of report. These are:
Profitability;
Liquidity; and
Efficiency.

Calculations and supporting data are provided in an appendix to this report, should you wish to refer to them.

Profitability
The first point that should be made is that Leonard plc is highly profitable under almost all standard measures.

Gross margin and net margin are exceptionally high, and should the business grow as projected, will lead to very
fast growing profits. Gross margins were 80% in 2016, falling to a still excellent 64% in 2017. Allowing for the unusual
cost incurred in 2017, and assuming this had not happened, the gross margin would have been close to 72%. Whilst
this is a decrease from the 2016 figure, it should be noted that high volumes at a 72% margin will lead to more profit
that lower volumes at an 80% margin. Hence it is not a bad thing to see the margin drop somewhat as volumes
increase, provided the additional profit outweighs the lower margin. Whilst this did not happen in 2017, it is
reasonable to project that this will happen going forward, as set-up issues get resolved and volumes continue their
expected growth.

Return on capital employed is reasonable, although not exciting. It seems from the nature of your business, and from
discussions with your finance director, that significant capacity now exists to leverage the existing capital base, and
grow sales volume substantially. This will lead to growth in the return on capital.

Return on equity is higher than ROCE, suggesting that your business is using borrowed funds effectively to leverage
equity. This effect should only increase as the business scales up.

Liquidity
The liquidity of Leonard plc has improved significantly over the past year.

Page 12
The current ratio improved from 1.16:1 to 1.47:1. The Acid Test (Quick) ratio likewise improved from 0.78:1 to 1.02:1.
These changes transform the ratios from being worryingly low in 2016 to their present improved levels.

This change is mainly due to the capital raised which contributed €570m to company funds. Much of this was
invested in future expansion, but whilst many business see a liquidity crunch when expanding, you appear to have
managed this very well.

Longer term liquidity is measured by the Gearing ratio. This was very conservative in 2016, at 57%. The ratio (on
a debt/equity basis) extended to 110% in 2017, due to additional debt taken on to fund the expansion. This appears
to have led to an increased interest rate. The 2016 debt incurred interest at 5% (15/300) whilst the 2017 debt was
charged at 6.7% (50/750). This means the marginal debt in incurring a marginal interest rate of 7.8% (50-15) / (750-
300) per annum. This appears justified given the strength of the market opportunity opening to you. However, be
aware that return on capital needs to exceed this rate or else the business will start hemorrhaging cash. This can
turn into a vicious circle very easily. Note carefully the date the loan is due for repayment or renegotiation (2022).
This can create a liquidity trap unless the business performs as projected in the meantime.

Overall, there seems to be little liquidity pressure on this company. There is ample cash to pay short-term liabilities
as they fall due.

Efficiency
This is an area I recommend that some close attention be paid to. There seems to be some weaknesses in the
management of working capital.

Inventory days appear to be high, although they are improving. This may be due to the long shipping times inherent
in your business model. However, I recommend examining this to see if improvements can be made.

This does appear to be compensated for somewhat by longer payables days. If goods are spending a long time on
ships, and yet your firm has not paid for them, this is cash neutral. It may be worth checking if the price paid would
be cheaper if goods were paid for more quickly. Thre is often a hidden costs to long payables days, in that a higher
price than necessary may be charged by suppliers.

Receivables days, likewise, look as if tighter management would benefit the business. 68-69 days is longer than
normal to be allowing customers to pay for goods purchased. The nature of the product is such that it may become
obsolete quite quickly. If this happened, customers may struggle to pay for goods that are no longer selling for them.
As gross margins are so high, there may be scope to offer customers a discount for quicker payment. This would
pay for itself in lower interest and lower bad debt costs.

Outlook for the future


Although profit for 2017 was the same as 2016 despite greater volumes, this is not a concern to me. On examining
your figures, it seems clear that there were one-off items affecting performance in 2017 that will not recur. I have
recalculated the key ratios on the basis that the €22 million in extra purchase costs will not recur in 2018. The
revised ratios show a much more positive performance. I have assumed that €22 million would be saved, as
instructed, and that this would be taxed at the company’s average rate of 11%.

Looking forward to 2018, if sales volumes achieve 20% growth as predicted, profit for the year could be reasonable
expected to reach €121 million. This is a full 57% ahead of the 2017 performance. This would place Leonard plc on
a very strong financial footing. If this growth rate can be maintained, I foresee a very bright future indeed.

Conclusion
Should you have any further questions please feel free to contact me at any time.

Page 13
SOLUTION 3

Marking Scheme:
8 parts * 2.5 mark each [Total: 20 Marks]

SUGGESTED SOLUTION:

Part 1: Answer (d)


The current liability is that portion of the liability recognized at 31 March 2017 that is payable within 12 months of
the reporting date. Hence:

Total payment due within 12 months (31 March 2018) €12,063.45


Interest yet to be accrued included in this amount * (2,093.65)
Capital sum payable in 1 year 9,969.80

* Note:
Interest to be accrued in the next 12 months to 31 March 2018 is 10% of the total liability at 31 March 2017. This
is calculated as follows:
Initial lease liability €40,000
Less up front payment (10,000)
Effective opening liability 1 April 2016 30,000
Finance cost to 31 March 2017 (@10%) 3,000
Payment 31 March 2017 (12,063.45)
Total lease liability 31 March 2017 20,936.55
Finance cost (interest) to 31 March 2018 (@ 10%) 2,093.65

Part 2: Answer (a)


Transactions are to be reported in accordance with their substance. Redeemable preference shares represent an
obligation to repay the money at some stage, hence should be reported as liabilities.

The other statements are violations of applicable accounting standards, hence do not represent examples of faithful
representation except potentially in exceptionally rare circumstances.

Part 3: Answer (a)


The provision should be recognized at 1 April 2016 at its present value, or €16.21 million. By 31 March 2017, 1 year
has passed, so the provision should be increased by 8%, representing the unwinding of 1-year’s discount. The
difference should be charged to finance costs in profit or loss.

An alternative method would be to discount the expected cost of €30 million by 7 years, to reflect the new reporting
date. The same answer would result.

Part 4: Answer (b)


Trade receivables a/c
€ €
Revenue 28,090 Profit or loss (gain) 1,321
Balance c/d 29,412
28,090 28,090

31 Jan 2017:
GB£ 25,000 / 0.89 = € 28,090
This is recorded as trade receivables and revenue.

Balance 31 March 2017:


GB£ 25,000 / 0.85 = €29,412
This remains receivable, and under IAS 21 should be remeasured as it is a monetary item.

The balancing figure is the overall gain or loss. It is a gain here, as we are owed more than was originally recorded.

Page 14
Part 5: Answer (c)

Group gain (loss) on disposal is calculated as follows:


Proceeds 86 million
Less carrying value of assets sold:
Identifiable net assets (100%) 103m
Goodwill 6m
Less NCI share in the above (30%) (31m)
Carrying value of Pineapple’s share 78 million
Gain on disposal 8 million

Tutorial notes:
Identifiable assets do not include goodwill. Goodwill is an asset of the subsidiary, and should be included at its
carrying value.

The parent’s share of the new assets and goodwill is not necessarily 70% of the total. NCI represents the carrying
value of the ownership interest that is not the parent’s, hence the parent’s ownership is calculated as the total less
the NCI share.

The NCI share may not be proportional to the shareholding for three possible reasons:
(1) If goodwill at acquisition is measured using the proportion of net assets method, the NCI will not share in any
of the goodwill value.
(2) If goodwill at acquisition is measured using the fair value method, the portion attributable to the NCI is often
not proportional to their share of the voting equity.
(3) There may be ownership interests not represented by voting equity, such as preference shares.

Part 6: Answer (a)

Investment in Associate: €m
Cost 6.2
Share of profit for year (2.5 * 40%) 1.0
Share of OCI (0.5 * 40%) 0.2
Total 7.4

Part 7: Answer (c)

€m
Profit before tax 30
Depreciation 6
Decrease in provision (3)
Decrease in inventory 1.6
Increase in trade payables 2.2
Cash flow generated 36.8

Part 8: Answer (c)

Inventory should be recorded at the lower of cost and net realizable value, taking each line of goods separately.

Hence:
Item Quantity Cost per unit in € Net Realisable Value per unit in € SOFP Value in €
A45116 50 30 42 1,500
A92310 75 40 35 2,625
Total 4,125

Page 15
SOLUTION 4

Marking Scheme:

(a) Explanation of the term “Events after Reporting Date” 2


Definition of the period such events are to be considered 2
Accounting treatment and disclosures for adjusting events 2
Accounting treatment and disclosures for non-adjusting events 2
Subtotal 8

(b) 4 parts at 3 marks each 12


Subtotal 12

[Total: 20 Marks]

SUGGESTED SOLUTION

(a) It is normal that financial statements take some time after the year-end to be finalised, audited and approved
for issue by the board of directors. Events after the reporting date are those events, favourable and
unfavourable, that occur between the reporting date and the date when the financial statements are authorised
for issue.

Adjusting event:
An adjusting event is an event which provides further evidence of a condition existing at the reporting date.
An entity shall adjust the amounts recognised in its financial statements for the period just ended to reflect
adjusting events after the reporting period.

Non-adjusting event:
An entity shall not adjust the amounts recognised in its financial statements to reflect non-adjusting events
after the reporting date. In this case, there was no condition existing at the reporting date, so no adjustment
should be made.

Disclosures should be made in the financial statements of significant non-adjusting events after the reporting
date.

If a non-adjusting event means the going concern concept no longer applies to the entity, the event should
be treated as an adjusting event, and the financial statements should not be prepared on a going concern
basis.

(b)
(i) It would appear that the event causing the loss in value only occurred after the reporting date. There was no
condition existing at the reporting date. Had we sold the goods at the reporting date we would have obtained
full price for them. Hence this is a non-adjusting event. If the loss is material, disclosure of the event should
be made in the notes to the financial statements.

(ii) Unless it is clear that a particular event between 31 March and 15 April 2017 caused the drop in the value of
this investment, it should be assumed that the investment had in fact lost value on 31 March 2017, and the
subsequent valuation only provided evidence of this. Hence, the receipt of the valuation is an adjusting event,
and the investment should be written down at the reporting date.

(iii) The liability existed at the reporting date, but confirmation of the amount was only received on 20 April 2017.
This is an adjusting event, and the treatment of this item in the financial statements (assuming a nil payment)
should be amended to reflect the information received subsequently. Accordingly, provision should be made
for the entire amount of the judgment. The filing of the insurance claim only took place following the reporting
date, hence no account should be taken of this at 31 March 2017. As confirmation of the success of the claim
was received prior to the signing off date, this should be disclosed in the notes.

(iv) The prize was actually won before the reporting date. Hence the financial statements should reflect this even
though the notification only arrived on 3 April. This is an adjusting event.
Page 16
SOLUTION 5

Marking Scheme:

(a) Recording a new building in the financial statements


any 4 valid points @ 1 mark each 4
Subtotal 4

(b) Accounting for subsequent expenditure on an existing building


any 4 valid points @ 1 mark each 4
Subtotal 4

(c) Capitalisation and expensing of correct items 6


Journal entry to record all costs incurred and correct existing entry 2
Calculation of correct depreciation charge for the period, and journal entry to record same. 4
Subtotal 12

[Total: 20 Marks]

SUGGESTED SOLUTION:

(a) Definition:
The term “property, plant and equipment” includes tangible items that:
• Are held for use in the production or supply of goods or services, for rental to others, or for administrative
purposes; and
• Are expected to be used during more than one period.

Recognition of a non-current asset:


An item of Property, Plant or Equipment should be recognised in the books if:
• It is probable that the economic benefits derived from the item will flow to the business AND
• The cost / value can be measured with reliability.

Cost of a non-current asset includes:


• Purchase price, including import duties and non-refundable purchase taxes
• Incidental costs of acquisition – any cost directly attributable to bringing the asset to the location and
condition necessary for it to be brought into productive use. Examples: Delivery, Installation, Legal &
Professional Fees.
• Finance costs (only those incurred up until the asset is substantially ready for use) must be capitalised
under IAS 23 (see later).
• The initial estimate of the costs of dismantling and removing the item and restoring the site on which it
is located, if the entity has, at the time of purchase, an obligation to incur such expenditure.
• The capitalised cost of any asset cannot exceed its recoverable amount.
• The term “capitalise” means that the amount in question is recorded as an asset. The opposite of
“capitalise” is to “write off as an expense”, in which case the amount in question is recorded as an
expense in the SPLOCI. Although both are debit entries, it is important to choose the correct class of
account – asset or expense. The credit entry remains the same regardless.

(b) Subsequent expenditure


Such expenditure should usually be written off to profit or loss as incurred. If, however, an obligation exists to
incur further expenditure of a capital nature, then this should be capitalised also. Subsequent commitments
entered into should be capitalised in three circumstances:
o If subsequent expenditure enhances the economic benefits to be derived from the asset in excess of
the previously assessed standard of performance,
o Where a component of an asset treated separately for depreciation purposes is replaced,
o Where the expenditure relates to a major inspection or overhaul which restores economic benefits
consumed by the entity and already charged as depreciation.

Page 17
(c) The following amounts should be capitalised, as they appear to be directly attributable to bringing the asset
into a condition in which it is ready for use:
€’000
Purchase of site 200
Legal costs and stamp duty on site purchase 16
Demolition of existing derelict building on site 18
Design and planning costs 49
Redesign costs due to conditions of planning permission 15
Tendering and procurement costs 5
Construction contractor’s fee to builder’s finish 754
Completion, painting and furnishing 113

Total 1,170

The following amounts should be expensed:


€’000
Redesign costs due to errors in the original design 12
Management time spent on the above, estimated apportionment 22
Rectification costs due to contractor error, not covered by the contractor 13
Cost of moving in staff, files and equipment 37
Cancellation costs of operating lease on previous headquarters building 31

Total 115

Reasons:
• Costs due to error do not add to the economic value of an asset. They are effectively wastage, and
should be expensed as incurred.
• Apportionment of management time are indirect costs. They are not “directly attributable” to the
construction.
• Costs of moving in are not necessary to bring the asset into a location or condition where it is ready for
use.
• Cancellation costs on an old building have nothing to do with a new building. They do not add any value
to the economic benefits derived from the new building.

Hence the journal entry required to record the new building at 31 December 2017 is as follows:

DR €’000 CR €’000
Dr Property, plant & equipment 1,170
Dr profit or loss 115
Cr Suspense 1,285

As the building is ready for use 3 months prior to the reporting date, 3 month’s depreciation should be provided.
Depreciable amount: €’000
Total capitalised cost 1,170
Less land component (200+16+18) (234)
Less residual value (140)
Depreciable amount 796

Annual depreciation charge (796 / 50 years) 15.92


Charge for three months 3.98

Hence the journal entry required to record depreciation of the new building at 31 March 2017 is as follows:

DR €’000 CR €’000
Dr Profit or loss 3.98
Cr Accumulated Depreciation PPE 3.98

Page 18
CORPORATE REPORTING
PROFESSIONAL 1 EXAMINATION - AUGUST 2017

NOTES:
You are required to answer Questions 1, 2 and 3. You are also required to answer either Question 4 or 5.
Should you provide answers to both Questions 4 and 5, you must draw a clearly distinguishable line through
the answer not to be marked. Otherwise, only the first answer to hand for Question 4 or 5 will be marked.

Note: You have optional use of the Extended Trial


Balance, which if used, must be included in the answer booklet.

Provided are pro-forma:

Statements of Profit or Loss and Other Comprehensive Income By Expense, Statements of Profit or Loss
and Other Comprehensive Income By Function, and Statements of Financial Position.

TIME ALLOWED:
3.5 hours, plus 10 minutes to read the paper.

INSTRUCTIONS:
During the reading time you may write notes on the examination paper, but you may not commence
writing in your answer book. Please read each Question carefully.

Marks for each question are shown. The pass mark required is 50% in total over the whole paper.

Start your answer to each question on a new page.

You are reminded to pay particular attention to your communication skills, and care must be taken
regarding the format and literacy of your solutions. The marking system will take into account the
content of your answers and the extent to which answers are supported with relevant legislation, case
law or examples, where appropriate.

List on the cover of each answer booklet, in the space provided, the number of each question
attempted.

NB: PLEASE ENSURE TO ENCLOSE YOUR ANSWER SHEET TO QUESTION 3 IN THE


ENVELOPE PROVIDED.

The Institute of Certified Public Accountants in Ireland, 17 Harcourt Street, Dublin 2.


CORPORATE REPORTING
THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND

PROFESSIONAL 1 EXAMINATION – AUGUST 2017

You are required to answer Questions 1, 2 and 3. You are also required to answer either Question 4 or 5.
Time allowed: 3.5 hours, plus 10 minutes to read the paper.

Should you provide answers to both Questions 4 and 5, you must draw a clearly distinguishable line through the
answer not to be marked. Otherwise, only the first answer to hand for Question 4 or 5 will be marked.
You are required to answer Questions 1, 2 and 3.
1. The following Statements of Profit or Loss and other Comprehensive Income relate to Allen Plc (Allen) and its
investee companies, Corrib Plc (Corrib) and Neagh Plc (Neagh). Neagh is based in Northern Ireland. It produces,
sells, and is managed autonomously in Northern Ireland. Accordingly, its financial statements are presented in
GB£ Sterling as the functional currency.

Statements of Profit or Loss and Other Comprehensive Income for year ended 31 July 2017

Allen Plc Corrib Plc Neagh Plc


€ million € million GB£ million
Revenue 225 240 60
Cost of sales (130) (123) (18)
Gross profit 95 117 42
Operating expenses (27) (75) (18)
Finance costs (12) (21) (2.4)
Other income 8
Investment income 14 - -
Profit before taxation 78 21 21.6
Taxation (10) (3) (4)
Profit for the year 68 18 17.6

Other comprehensive income (items that will not be reclassified to profit or loss):
Gains on revaluation of property 24 6 -
Total comprehensive income for the year 92 24 17.6

The following additional information is provided:

(i) Allen purchased a 70% holding in the equity of Corrib on 1 December 2016. The purchase price was €200 million
paid in cash. Goodwill arising on acquisition was calculated at €30 million, using the fair value method. On 31
July 2017, impairment losses amounting to €10 million had been incurred. No accounting entry was made to
reflect the impairment.
(ii) Allen purchased a 60% holding in Neagh on 1 August 2016, for an immediate cash payment of £80 million. On
that date, the fair values of the identifiable net assets of Neagh totalled £100 million, which was the same as their
carrying values in the books of Neagh. The 40% non-controlling interest had a fair value of £50 million on 1 August
2016. No impairment of goodwill had occurred by 31 July 2017. The directors of Allen wish to use the fair value
method for all acquisitions.
(iii) On 1 December 2016, the fair value of certain plant & equipment held by Corrib was €3 million more than its
carrying value. This plant & equipment had a useful economic life of 5 years from the date of acquisition. The
revised values have not been incorporated into the books of Corrib and depreciation was accounted for based on
the original carrying values.
(iv) During the post-acquisition period Corrib sold goods to Allen for €4 million. These goods were sold at a gross
margin of 25% of transfer price. 30% of the goods remained in the inventory of Allen at 31 July 2017.
(v) Corrib declared a dividend of €6 million during the year from post-acquisition profits. Allen has recognised its
share of this dividend within ‘investment income’.
(vi) All workings may be taken to the nearest €0.1 million. The £ / € exchange rate was as follows during the relevant
period:
Date £ per €1
1 August 2016 0.89
31 July 2017 0.81
Average for period 0.85

Page 1
REQUIREMENT:

(a) Calculate the following:

(i) the goodwill arising on the acquisition of Neagh at the date of acquisition; and
(ii) the goodwill figure in respect of Neagh to be reported in the group accounts for the Allen Group at 31 July
2017.

Explain clearly the accounting treatment of any difference between the two figures. (5 marks)

(b) Prepare a consolidated Statement of Profit or Loss and Other Comprehensive Income for the Allen Group for year
ended 31 July 2017 in accordance with IFRS. Your answer should show clearly the amount of any exchange gains
or losses recognised during the period.
(20 marks)

(c) Discuss what is meant by the concept of an entity’s functional currency and how it may be determined in
accordance with IAS 21 The Effects of Changes in Foreign Exchange Rates.
(5 marks)

[Total: 30 Marks]

Page 2
2. The following trial balance was extracted from the books of Eaglesmount Plc on 31 July 2017.

Note Dr Cr
€’000 €’000
Cost of sales 76.8
Distribution costs 24.4
Administration expenses 12.0
Provision for warranty claim (i) 12.0
Land and buildings at cost (including land €24,000) (ii) 160.0
Accumulated depreciation 1 August 2016 – land & buildings (ii) 8.0
Revaluation surplus 1 August 2016 (ii) 24.0
Plant and equipment at cost (iii) 260.0
Accumulated depreciation 1 August 2016 - plant and equip (iii) 124.0
Revenue (iii) 240.8
Investment property (iv) 128.0
Equity investments (v) 33.6
Trade receivables 27.6
Inventory at 31 July 2017 24.8
Cash and bank 35.2
Trade payables 18.4
Corporation tax (vi) 1.6
Equity shares of 10c each (viii) 80.0
Share premium account (viii) 140.0
Equity investment reserve (v) 5.6
6% Debenture (issued on 1 March 2017) (vii) 80.0
Equity dividend paid 9.4
Retained earnings reserve 1 August 2016 60.6
793.4 793.4

The following notes are relevant to your answer:

(i) Eaglesmount Plc maintains a provision for warranty claims expected to arise in the future on goods sold. At the
reporting date this provision was carried at €12,000. It has been agreed that this provision should be increased
to €17,500.
(ii) Land and buildings are carried under the revaluation model, as permitted by IAS 16. The most recent valuation
took place on 31 July 2015, resulting in the values included in the trial balance above. The revaluation surplus of
€24,000 resulted solely from these land and buildings. The buildings were estimated to have a useful economic
life of 17 years as at that date and zero residual value. On 31 July 2017, the land was revalued to €20,000 and
the buildings to €90,000. There was no change to the useful life estimates of the buildings. Depreciation is
recognised on a straight line basis through cost of sales, and no depreciation has yet been charged for the year
ended 31 July 2017.
(iii) Plant & equipment is being depreciated through cost of sales at 20% per annum reducing balance. On 31 July
2017, a piece of plant which cost €40,000 on 1 August 2015 was sold for €22,000. The only entries made to
record this transaction were to debit cash and credit sales revenue with €22,000.
(iv) Investment properties are accounted for under the fair value model of IAS 40. The figure included in the trial
balance above represents the fair value of these properties at 1 August 2016. The fair value of these properties
at 31 July 2017 was €140,000.
(v) The figure for equity investments represents the fair value of equities held at 1 August 2016 plus the cost of
equities purchased during the year. As permitted by IFRS 9, an election was made at the date of purchase to
account for any fair value gains and losses on all these equity investments through ‘other comprehensive income’.
Eaglesmount Plc takes such gains and losses to a separate component of equity. The fair value of the equity
investments at 31 July 2017 was €25,000.
(vi) Corporation tax for the year was estimated at €22,000. The balance in the trial balance is a residual amount
following the payment of corporation tax for year ended 31 July 2016 and its offset against the provision made
that year.
(vii) The debentures were issued during the year. Interest is payable annually in arrears. No interest has been provided
for or paid as at 31 July 2017.
(viii) €40,000 was raised on 31 July 2017 through the issue of equity shares. This was correctly accounted for by
crediting €16,000 to equity share capital and €24,000 to share premium.

Page 3
REQUIREMENT:
Prepare, in a form suitable for publication to the shareholders of Eaglesmount Plc:

(a) Statement of Profit or Loss and Other Comprehensive Income of Eaglesmount Plc for the year to 31 July 2017;

(12 marks)

(b) Statement of Changes in Equity for year ended 31 July 2017; (4 marks)

(c) Statement of Financial Position as at 31 July 2017. (12 marks)

(d) Calculate basic earnings per share for the year. (2 marks)

[Total: 30 Marks]

Note: Notes to the financial statements are not required but all workings should be shown.

Page 4
3. The following multiple-choice question contains eight sections, each of which is followed by a choice of
answers. Only one answer is correct in each case. Each question carries equal marks. On the answer
sheet provided indicate for each question, which of the options you think is the correct answer. Marks will
not be awarded where you select more than one answer for any question.

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

1. On 1 August 2016, Potato Plc purchased 80% of the equity shares of another entity, Turnip Plc. At the date of
acquisition, Turnip Plc had a research project in progress on which it had spent €12 million to date. None of this
had been capitalised as the project did not meet the criteria laid down by IAS 38 Intangible Assets for recognition
as an intangible asset. However, the directors of Potato Plc saw great potential in the project and took it into
account in deciding to buy a controlling interest in Turnip Plc. Independent experts assigned the research project
a fair value of €25 million on 1 August 2016, and €30 million at 31 July 2017.

At what value should the research project be carried in the consolidated statement of financial position of Potato
Plc at its reporting date 31 July 2017?

(a) €NIL
(b) €12 million
(c) €25 million
(d) €30 million.

2. Carrot Plc purchased a 6% €50 million bond on 1 August 2016 at a 10% discount to par value. Expenses of
purchase were €500,000. The bond is due for redemption on 31 July 2026 at par. The effective annual interest
rate to maturity is 7.3%. Carrot Plc intends to hold the bond until its maturity date. At 31 July 2017, the fair market
value of the bond was €48 million.

How much should be recognised in Carrot Plc’s profit or loss in respect of the above transaction for year ended
31 July 2017 (to two decimal places)?

(a) €2.5 million


(b) €3.32 million
(c) €3.0 million
(d) €3.65 million.

3. IAS 20 Accounting for Government Grants and Disclosure of Government Assistance sets out guidance for
recording grants received to assist with the purchase of capital assets (capital grants). Which of the following is
true?

(i) Capital grants are credited to the asset account, thus reducing the carrying value of the asset to the cost
net of grant aid; or
(ii) Capital grants are credited to a separate deferred income account, the balance on which is amortised to
profit or loss over the period the related asset is expensed to profit or loss.

(a) (i) only


(b) (ii) only
(c) Either (i) or (ii) is permitted
(d) Neither (i) nor (ii) is permitted.

4. On 31 August 2017, the taxation liability account in the books of Cabbage Plc showed a debit balance of €17,500
after paying the 2016 liability. The estimated liability for 2017 is €84,500 and no entry has yet been made to record
this.

Which journal entry is required to record the above?

Debit Credit
(a) Profit or loss (taxation) €102,000 Taxation liability €84,500
(b) Profit or loss (taxation) €84,500 Taxation liability €84,500
(c) Profit or loss (taxation) €67,000 Taxation liability €67,500
(d) Profit or loss (taxation) €102,000 Taxation liability €102,000

Page 5
5. Companies often use industry average ratios to judge performance against their peers. This can yield useful
information, but must be used with care to avoid drawing unreasonable conclusions.

Which one of the following factors would most undermine any comparison of an entity’s accounting ratios with
industry averages?

(a) Companies have widely varying year-end dates


(b) The market for the industry’s products has become very competitive due to online retailers
(c) Many staff members in the industry have become independent contractors rather than employees
(d) Accounting policies vary widely across the industry.

6. The following information has been calculated following an analysis of the financial statements of Mangetout Plc
for year ended 31 July 2017:

Operating cycle 50 days


Inventory turnover 10 times
Trade payables €12 million
Credit purchases €150 million

What is the figure for trade receivables collection period in days? (Rounded to the nearest day)

(a) 37
(b) 29
(c) 43
(d) Impossible to determine from the above information.

7. The following information has been calculated following an analysis of the financial statements of Broccoli Plc for
year ended 31 July 2017:

Gross margin 24%


Net margin 8%
Return on capital employed 14%
Return on equity 6%

Which one of the following statements is most likely to be true based only on the above information?

(a) Operating expenses are 16% of revenue


(b) 8% of revenue is lost on interest and taxation
(c) Capital employed is less than equity
(d) Asset turnover is 200%.

8. On 31 July 2016, “trade and other receivables” of Onion Plc stood at €245,000 including an amount of €25,000
in respect of the sale of an equity investment. The equivalent figure on 31 July 2017 was €472,000, all of which
related to trade receivables.

How should the increase in trade receivables appear in the “operating activities” section of the statement of cash
flows for year ended 31 July 2017?

(a) €252,000 – added to profit before tax


(b) €252,000 – deducted from profit before tax
(c) €227,000 – added to profit before tax
(d) €227,000 – deducted from profit before tax.
[Total: 20 marks]

Page 6
Answer either Question 4 or Question 5
4. IAS 37 Provisions, Contingent Liabilities and Contingent Assets sets out the accounting treatment and disclosures
for these transactions and events. The standard discusses general principles of recognition, measurement and
presentation as well as specific application guidance for certain issues. This guidance aims to assist preparers of
financial statements in applying IAS 37.

The following situations have arisen during the preparation of the draft financial statements of Haywood Plc for
year ended 31 July 2017:

(i) On 1 August 2016, Haywood Plc acquired a nuclear power plant at a cost of €200 million. Part of the
arrangement was that the plant be dismantled and the site restored after its useful economic life of 20 years
had passed. The cost of restoration was estimated on 1 August 2016, after discounting to present value, to
be €40 million. This amount reflected an appropriate discount rate of 6%, (75% of this estimate related to
the dismantling of the plant, and 25% to the removal of waste fuel). At 31 July 2017, due to regulatory and
other obstacles, no power had yet been produced, hence no waste fuel had been generated.

(ii) During the year ended 31 July 2017, Haywood Plc decided to close both its coal burning power generating
plants in October 2017. This decision has been announced publicly, and a detailed formal plan prepared.
The plan proposes to make 75 employees redundant, retrain 25 other staff to work in the nuclear plant, and
sell the coal-fired plants in their current condition. It is anticipated that the redundancy costs will amount to
€7.5 million, and the retraining will cost €1 million. The coal plants will be disposed of for zero consideration
as the new owner will be expected to dismantle the plants and clean up the sites. The carrying value of
these plants is €12 million at 31 July 2017.

REQUIREMENT:

(a) Discuss the accounting treatment in relation to provisions, contingent liabilities and contingent assets required by
IAS 37.
(8 marks)

(b) In the case of (i) and (ii) above, set out the appropriate accounting treatment as at 31 July 2017, applying IAS 37
and other relevant standards.
(12 marks)

[Total: 20 Marks]

OR

Page 7
Should you choose to attempt Question 5, then you will be required to attempt both Part A and Part B
5.
Part A:
IFRS 5 Non-current Assets Held for Sale and Discontinued Operations sets out the principles governing the
measurement and presentation of non-current assets that are expected to be realised through sale rather than through
continuing use. The standard also deals with reporting the results of operations that qualify as discontinued.

REQUIREMENT:
Discuss the conditions which must be present in order to classify a non-current asset as being “held for sale” and explain
the accounting treatment that applies when such a classification is deemed appropriate.
(7 marks)

Part B:
Strawboy Plc is a long-established travel agent, operating through a network of retail outlets and an online store. In
recent years, the business has seen its revenue from the online store grow strongly, and that from retail outlets decline
significantly. On 25 January 2017, the board decided to close the retail network at the financial year end of 31 July 2017,
and put the buildings up for sale on that date. The directors are seeking advice regarding the treatment of the buildings
in the statement of financial position, as well as the treatment of the trading results of the retail division for the year. The
following figures are available at 31 July 2017:

Carrying value of buildings €20.0 million


Fair value less costs to sell of buildings €17.2 million
Other expected costs of closure €3.9 million

Trading results:
Year ended 31 July 2017 Year ended 31 July 2016
Online Store €m Retail Outlet €m Online Store €m Retail Outlet €m
Revenue 39 9 32 12
Cost of Sales (13) (7) (11) (9)
Gross profit 26 2 21 3
Operating costs (10) (5) (8) (5)
Profit before tax 16 (3) 13 (2)

REQUIREMENT:
(a) Outline the conditions which must be present in order to present the results of an operation as “discontinued” and
the accounting treatment that applies when such a classification is deemed appropriate.
(5 marks)

(b) Draft the Statement of Profit or Loss for Strawboy Plc for year ended 31 July 2017, together with the comparative
for 2016, taking the above information into account.
(8 marks)

[Total: 20 Marks]

END OF PAPER

Page 8
SUGGESTED SOLUTIONS

CORPORATE REPORTING
THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND

PROFESSIONAL 1 EXAMINATION – AUGUST 2017

SOLUTION 1

Marking Scheme:

(a) Calculation of goodwill on acquisition 2


Retranslation of goodwill at reporting date 1
Treatment of exchange gain 2
Subtotal 5

(b) Statement
Basic consolidation plan (100% Allen + 100% Corrib * 8/12 + 100% Neagh) 5
Translation of Neagh’s SPLOCI 3
Goodwill impairment (inclusion in expenses) 1
Depreciation on FVA (calculation and inclusion in expenses) 1
Intra-group revenue and purchases (exclusion) 2
Unrealised profit (calculation and addition to cost of sales) 1
Intragroup dividend (exclusion) 1
Calculation of exchange gain on net assets 3
Calculation and attribution of results to NCI and owners of parent 3
Presentation 1
Subtotal 21 max 20

(c) Written question


Define functional currency 2
Factors in determining functional currency (3 X 1 mark) 3
Subtotal 5

SUGGESTED SOLUTION

(a) Group structure:


Allen plc – Parent
Corrib plc – 70% subsidiary of Allen for 8 months therefore include 100% of results * 8/12.
Neagh plc – 60% subsidiary, acquired at beginning of year. Hence, include 100% of translated results for full year.

Requirement (a) – Goodwill on acquisition of Neagh 1 August 2016


£m rate €m
Cost of Investment 80 0.89 89.9
Value of NCI 50 0.89 56.2
Fair value of net assets at acquisition (100) 0.89 (112.4)
Goodwill at acquisition 30 33.7
Impairment losses to 31 July 2017 NIL
Exchange gain (balancing figure) _____ 3.3
Goodwill at 31 July 2017 30 0.81 37.0

The exchange gain of €3.3 million is recognised as other comprehensive income for the year. It is attributable to
both the parent and the NCI as the goodwill was calculated using the fair value method.

Page 9
(b) Allen plc: Consolidated statement of comprehensive income for year ended 31 July 2017
(100% Allen + 100% Corrib * 8/12 + 100% Neagh) € million
Revenue (225 +240 * 8/12 + 70.6 (i) -4 (v)) 451.6
Cost of Sales (130 +123 * 8/12 + 21.2 (i) -4 +0.4 (iv) +0.3 (v)) (229.9)
Gross Profit 221.7
Operating expenses (27 +75 * 8/12 +21.2 (i) +10 (iii)) (108.2)
Finance costs (12 +21 * 8/12 + 2.8 (i)) (28.8)
Other income (8) 8.0
Investment income (14 -4.2 (vi)) 9.8
Profit before taxation 102.9
Taxation (10 + 3 * 8/12 +4.7 (i) (16.7)
Profit for the year 85.8
Other comprehensive income:
Gains on revaluation of property (24 + 6 * 8/12 28.0
Exchange gain on translation of goodwill (see part (a) above) 3.3
Exchange gain on translation of other net assets (vii) 12.1
Other Comprehensive Income for the year 43.4
Total comprehensive income for the year 129.2

Profit for the year attributable to:


Owners of the parent (balancing figure) 77.1
Non-controlling interest (0.4 + 8.3) (ii) 8.7
85.8
Total comprehensive income attributable to:
Owners of the parent (balancing figure) 113.2
Non-controlling interest (1.6 + 14.4) (ii) 16.0
129.2

Working (i) – Translate Neagh’s SPLOCI (use average rate for year) € million
Revenue (60 / 0.85) 70.6
Cost of Sales (18 / 0.85) (21.2)
Gross Profit 49.4
Operating expenses (18 / 0.85) (21.2)
Finance costs (2.4 / 0.85) (2.8)
Profit before taxation 25.4
Taxation (4 / 0.85) (4.7)
Profit for the year 20.7
Total comprehensive income for the year 20.7

Working (ii) – non-controlling interest


Corrib Neagh
Profit €m TCI €m Profit €m TCI €m
per SPLOCI as given / translated (Corrib * 8/12) 12 16 20.7 20.7
Exchange gain on goodwill (from part (a)) 3.3
Goodwill impairment (iii) (10) (10)
Depreciation of FVA (iv) (0.4) (0.4)
Unrealised profit in inventory (v) (0.3) (0.3)
Exchange gain on other net assets (vii) 12.1
Adjusted figures 1.3 5.3 20.7 36.1
NCI percentage 30% 30% 40% 40%
NCI amount 0.4 1.6 8.3 14.4

Working (iii) – goodwill impairment


Impairment loss on consolidated goodwill €10m is included as operating expense in year of recognition.
NCI is affected as goodwill was calculated using the fair value method.

Working (iv) – consequences of fair value adjustment


Additional depreciation from fair value adjustment 3m / 5 years * 8/12 = €0.4m
Current year’s amount included as cost of sales expense this year.
NCI is affected as it is Corrib’s asset that is being adjusted.

Page 10
Working (v) – Intra-group trading
Eliminate intra-group sales and purchases (€4m) in full from group revenue and group cost of sales.
Closing unrealised profit provision required = 4m * 25/100 * 30% = €0.3m
Corrib’s NCI is affected as Corrib was the internal selling company which recorded the gain.

Working (vi) – Intra-group dividend


Eliminate intragroup dividend from investment income 6m * 70% = €4.2m. No effect on NCI.

Working (vii) - Exchange gain (loss) on other net assets of Neagh (excl goodwill)
€M €M
Net assets of Neagh at acquisition:
As translated at acquisition date (100 / 0.89) (from part (a)) 112.4
As translated at reporting date (100 / 0.81) (at closing rate) 123.5
Gain 11.1

Net assets earned during year ended 31 July 2017 (TCI):


As translated per SPLOCI (17.6 / 0.85) (W(i)) 20.7
As translated at reporting date (17.6 / 0.81) (at closing rate) 21.7
Gain 1.0
Total gain 12.1

Gain is recognised as OCI for the year. NCI shares in this gain as they are 40% shareholders in Neagh.

(c) Functional currency:


The functional currency of an entity can be understood literally as the currency in which the entity functions. The
choice of functional currency is a judgment which must be made under IAS 21. The judgment involves assessing
the facts, and deciding the currency on which the entity is most dependent economically. For most entities, the
functional currency is a clear judgment, in that most entities operate primarily within a single economy or currency
zone.

However IAS 21 does offer some guidance should the judgment prove difficult. This can happen if more than one
currency is important to the entity and it is not clear which is the most significant. IAS 21 requires that the entity
consider:

Primary considerations:
• The currency which most affects sales prices; and
• The currency in which purchases and other costs are incurred.

Secondary considerations:
• The currency of the most significant providers of capital; and
• The currency in which operating receipts are retained.

Page 11
SOLUTION 2

Marking scheme:
(a) Statement of profit or loss and other comprehensive income
Transfer of figures from trial balance to appropriate headings 2
Eliminate sale proceeds of plant from revenue 1
Revaluation loss on land (calculation and inclusion in OCI and profit or loss 2
Depreciation on buildings (calculation and inclusion in cost of sales) 1
Depreciation on plant & equipment 1
Finance cost (calculation and inclusion in expenses) 1
Gain on investment property (calculation and inclusion in P/L) 1
Adjustment to admin expenses re warranty provision 1
Loss on disposal of plant 1
Tax (recognition in P/L) 1
Loss on equity investments (calculation and recognition in OCI) 1
Presentation 1
Subtotal 14 - Max 12

(b) Statement of Changes in Equity


Transfer of figures from trial balance to appropriate headings 1
Calculate opening share capital and share premium 1
Transfer of SPLOCI figures to correct equity account 2
Subtotal 4

(c) Statement of Financial Position


Transfer of figures from trial balance to appropriate headings 2
Depreciation & disposal of plant 2
Depreciation & revaluation of land & buildings 2
Loss on investment property (calculation and inclusion in NCA) 1
Gain on equity investments (calculation and recognition in NCA) 1
Transfer of figures from SOCIE 1
Tax (recognition as liability net of existing balance) 1
Debenture interest (calculation and recognition as liability) 1
Warranty provision (calculation and inclusion of correct amount in liabilities 1
Presentation 1
Subtotal 13 - Max 12

(d) Basic earnings per share


Use of correct earnings figure 1
Use of correct number of equity shares 1
Subtotal 2

Total 30

Suggested solution

(a) Eaglesmount plc: Statement of Profit or Loss and Other Comprehensive Income for year ended 31 July 2017

€ ‘000
Revenue (240.8 – 22 (iii) 218.8
Cost of Sales (76.8 +8 (ii) +27.2 (iii) (112.0)
Gross profit 106.8
Distribution costs (24.4) (24.4)
Administration expenses (12.0 + 5.5 (i)) (17.5)
Finance costs (vii) (2.0)
Loss on disposal of plant (iii) (3.6)
Loss on revaluation of land & buildings (ii) (10.0)
Gain on revaluation of investment properties (iv) 12.0
Profit before tax 61.3
Tax (vi) (23.6)
Profit for the year 37.7

Page 12
Other comprehensive income:
Loss on revaluation of land & buildings (ii) (24)
Loss on revaluation of equity investments (v) (8.6)
Other comprehensive income for the year (32.6)
Total comprehensive income for the year 5.1

(b) Eaglesmount plc Statement of Changes in Equity for year ended 31 July 2017
Share Share Revaluation Equity Retained Total
Capital Premium Surplus Investments Earnings Equity
€’000 €’000 €’000 €’000 €’000 €’000
Balance 1 August 2016 64 116 24 5.6 60.6 270.2
Issue of share capital (viii) 16 24 40
Total comprehensive income (24) (8.6) 37.7 5.1
Dividends paid (9.4) (9.4)
Balance 31 July 2017 80 140 0.0 (3.0) 88.9 305.9

(c) Eaglesmount plc Statement of Financial Position as at 31 July 2017


€ ‘000
Non-current assets:
Land & buildings, (160 – 50 - (8 +8 -16) (ii) 110.0
Plant & equipment (260 – 40 - (124+27.2 -14.4)) (iii) 83.2
Investment property (128 + 12 (iv)) 140.0
Equity investments (33.6 – 8.6 (v)) 25.0
358.2
Current assets:
Inventory 24.8
Trade receivables 27.6
Cash & bank 35.2
87.6
Total assets: €445.8

Equity:
Equity share capital (b) 80
Share premium (b) 140
Equity investment reserve (b) (3)
Retained earnings (b) 88.9
305.9
Non-current liabilities:
6% debenture 80

Current liabilities:
Trade payables 18.4
Provision for warranty claim (12 + 5.5 (i)) 17.5
Corporation tax due (-1.6 +23.6 (vi)) 22.0
Debenture interest accrued (vii) 2.0
59.9
Total equity & liabilities €445.8

(d) Basic Earnings per Share


Basic earnings per share is calculated as the profit for the year divided by the weighted average number of equity
shares in issue for the period.

Here, the profit for the year is €37,700


The number of equity shares excludes the shares issued, as these were only issued on the last day of the year.
Hence they have no impact on the weighted average calculation. Hence the number of shares is 640,000 [(80,000
– 16,000) / €0.10]

Basic EPS therefore is 37,700 / 640,000 = 5.89c

Working (i) – Provision for warranty claims


Increase administration expenses and provision for warranty by €5,500.

Page 13
Working (ii) – Land & Buildings
Depreciation for the year ended 31 July 2017 must be charged. As the revaluation occurs on the last day of the year,
depreciation for the year is based on the carrying values pre-revaluation.

Buildings amount = €160,000 – 24,000 = 136,000 at date of last revaluation


UEL at date of last revaluation = 17 years
Annual depreciation = 136 / 17 = €8,000
Charge to Cost of Sales and added to accumulated depreciation

Revaluation 31 July 2017:


Land Buildings
Carrying value 31 July 2017 (Buildings €136,000 – 8,000 – 8,000) €24,000 €120,000
Revalued amount 31 July 2017 20,000 90,000
Revaluation loss 4,000 30,000

The total revaluation loss (€34,000) exceeds the balance on the revaluation reserve (€24,000). Hence the reserve
is written off through OCI, and the additional loss (€10,000) taken to profit or loss. Accumulated depreciation is reset
to zero. It is easier to illustrate this through a journal entry:
DR €’000 CR €’000
Dr OCI / Revaluation reserve 24
Dr Profit or loss / Retained earnings 10
Dr Accumulated depreciation (land & buildings) 16
Cr Land & Buildings (brings valuation from 160,000 to 110,000) 50

Working (iii) – Plant & equipment


Depreciation for year ended 31 July 2017: € ‘000
Cost 260
Accumulated Depreciation to 1 August 2016 (124)
Carrying value 136
Depreciation at 20% 27.2

Charge €27,200 to cost of sales and increase accumulated depreciation accordingly.

Note: Depreciation for the year includes depreciation on the plant disposed of as it was in use for the full year.

Recognise gain (loss) on disposal as follows: € ‘000 € ‘000


Proceeds 22.0
Carrying value:
Cost 40.0
Less depreciation year 1 (to 31 August 2016) (8)
Less depreciation year 2 (current year) [20% * (40-8)] (6.4)
NBV at date of sale (25.6)

Loss on disposal (separate line if considered a material amount) (3.6)

Eliminate the NBV at disposal €25,600 from the plant & equipment accounts, eliminate €22,000 from revenue, and
charge €3,600 as a loss to profit or loss.

Working (iv) – Investment properties


Increase the investment properties balance by €12,000. Include the gain within profit or loss as per IAS 40.

Working (v) – Equity investments


Decrease the investment in equity instruments by €8,600 to bring the balance to its fair value of €25,000. Recognise
the loss in OCI and reduce the equity investments reserve as instructed.

Working (vi) - Taxation


Required taxation liability €22,000 (cr)
Existing taxation liability 1,600 (dr)
Required adjustment 23,600 (Cr)

Page 14
Corporation tax due is charged to P/L and recognised as a liability. There is an existing balance of €1,600 debit.
Hence the total charge to be recognised is €23,200, to offset the debit and create the required credit balance.
Charge this amount to profit or loss and credit to current liabilities.

Working (vii) – Debenture interest


The debentures were issued on 1 March 2017. Therefore 5 months’ interest should be accrued. €80,000 * 6% *
5/12 = €2,000. This is charged to P/L and recognised as a liability.

Working (viii) – Issue of shares


This is correctly accounted for. However, it is important to take this into account when completing the statement
of changes in equity.

Page 15
SOLUTION 3

Marking scheme:
2.5 marks per correct answer – Total 20 marks

Suggested solution (plus tutorial notes)

1. Answer (c)

In the consolidated financial statements, assets are capitalized at their fair value at the date of acquisition, even if
they do not qualify for capitalization in the individual statements of the acquired entity. The fair value of this asset
is €25 million on 1 August 2016.

As the project is still a research project at 31 July 2017, any additional expenditure incurred post-acquisition will
not be capitalized, as only development costs may be capitalized under IAS 38.

Revaluation of intangible assets is only permitted under IAS 38 if an active market exists in identical assets, from
which a market value can be obtained. That cannot be the case here as the research project is certainly unique.

2. Answer (b)

The initial carrying value of the bond will be as follows:


€m
Purchase price 45
Add: Purchase costs 0.5
Total cost recognised 45.5

Finance income will be recognized @ 7.3% of the opening carrying value 3.32

This bond meets the criteria for classifying it as Amortised Cost. These are (1) the cash flows to be derived from
the instrument are solely interest and principal, and (2) the entity intends to hold the instrument to draw the
contractual cash flows.

Hence the amortised cost method is appropriate. Fair value is irrelevant.

3. Answer (c)
IAS 20 permits either approach.

4. Answer (d)
The taxation liability needs to go from €17,500 debit to €84,500 credit. This means we must credit the account with
€102,000 to offset the existing debit and create the required credit balance.

As with any provision, the increase is taken to profit or loss as an expense, hence debit profit or loss.

5. Answer (d)
The first three factors are common across all companies in the industry. Hence, with limited exceptions, any
comparison should remain valid. However, the last point is hugely significant. As accounting numbers are being used
to calculate ratios, any variation in how these numbers are calculated will have serious implications for the quality
of information resulting from comparing these ratios across different entities.

6. Answer (c)

Operating cycle = Inventory days + Trade receivables days – Trade payables days.

Inventory days = 365 / 10 = 36.5 days


Payables days = 12 / 150 * 365 = 29.2 days

Hence Operating Cycle = 42.7 days such that 36.5 + 42.7 – 29.2 = 50 days

Page 16
7. Answer (a)

As gross margin is based on gross profit (GP / Revenue); and net margin on profit before interest and tax (PBIT /
Revenue), the difference between them is likely to be the expenses incurred, mainly operating expenses as interest
and tax are excluded.

The remaining statements are nonsense.

8. Answer (b)

The movement in trade receivables for adjustment to operating cash flow should not include amounts relating non-
trading items. Hence these need to be excluded.

Opening trade receivables (245,000 – 25,000) €220,000


Closing trade receivables €472,000
Increase over the year €252,000

An increase in trade receivables is cash negative, as it implies the non-receipt of cash in respect of revenue already
included in the profit before tax figure. Therefore, it is deducted from profit before tax.

Page 17
SOLUTION 4

Marking scheme:
(a) Accounting treatment:
Provisions 4
Contingent liabilities 2
Contingent assets 2
Subtotal 8

(b) Application: 2 scenarios @ 6 marks each 12


Total 20

Suggested solution

(a) The objective of this Standard is to ensure that appropriate recognition criteria and measurement bases are applied
to provisions, contingent liabilities and contingent assets and that sufficient information is disclosed in the notes to
enable users to understand their nature, timing and amount.

IAS 37 prescribes the accounting and disclosure for all provisions, contingent liabilities and contingent assets,
except:
• those resulting from executory contracts, except where the contract is onerous. Executory contracts are
contracts under which neither party has performed any of its obligations or both parties have partially
performed their obligations to an equal extent (example employment contracts);
• those covered by another Standard.

Provision:
A provision is a liability of uncertain timing or amount.

Contingent liability:
a possible obligation that arises from past events and whose existence will be confirmed only by the occurrence
or non-occurrence of one or more uncertain future events not wholly within the control of the entity; or
a present obligation that arises from past events but is not recognised because:
it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation;
or
the amount of the obligation cannot be measured with sufficient reliability.

Contingent asset:
is a possible asset that arises from past events and whose existence will be confirmed only by the occurrence or
non-occurrence of one or more uncertain future events not wholly within the control of the entity.

Accounting treatment
A provision should be recognised when, and only when:
• an entity has a present obligation (legal or constructive) as a result of a past event;
• it is probable (ie more likely than not) that an outflow of resources embodying economic benefits will be
required to settle the obligation; and
• a reliable estimate can be made of the amount of the obligation. The Standard notes that it is only in extremely
rare cases that a reliable estimate will not be possible.
Recognition of a provision involves creating a liability and an expense in the financial statements.

An entity should not recognise a contingent liability. An entity should disclose a contingent liability in the notes,
unless the possibility of an outflow of resources embodying economic benefits is remote, in which case it should
be ignored.

An entity shall not recognise a contingent asset. However, when the realisation of income is virtually certain, then
the related asset is not a contingent asset and its recognition is appropriate.

(b)
(i) The present value of the restoration cost should be capitalized as part of the cost of acquiring the asset if the
obligating event causing the liability has occurred. Here, the obligating event causing the obligation to dismantle the
plant has occurred, as the plant is built. However, the obligating event for the 25% relating to the removal of waste
fuel has not, as no waste fuel yet exists.

Page 18
Hence a provision should be recognized for €30 million (€40 million * 75%) at 1 August 2016. This will be added
to the purchase cost of the plant, capitalizing a total of €230 million.

At 31 July 2017, this amount will be depreciated over 20 years, being the useful economic life of the plant.
Accordingly, €11.5 million will be charged to profit or loss in respect of depreciation.

Finally, the provision will be remeasured due to the unwinding of the discount as time passes. An amount of €1.8
million (€30 million * 6%) will be charged to finance costs and credited to the provision.

(ii) IAS 37 requires the recognition of a restructuring provision only when (1) a detailed formal plan has been prepared
and it is unlikely that it will be withdrawn, and (2) this plan has been communicated to those affected. Both these
conditions appear to be met in this case.

Provision should be made on 31 July 2017 for the redundancy costs of €7.5 million, and the loss on disposal of
the plants €12 million. The retraining costs should not be provided for as these are not direct costs of the closure.
No obligating event has yet occurred to justify a provision for these costs.

Page 19
SOLUTION 5

Marking scheme:

Part A IFRS 5 requirements for an asset to be classified as “held for sale”


Any 7 relevant points from the solution or otherwise @ 1 mark per point. 7

Part B

(a) IFRS 5 requirements for an operation to be reported as “discontinued”


Any 5 relevant points from the solution or otherwise @ 1 mark per point. 5

(b) Application:
Draft statement of profit or loss and other comprehensive income 8
Total 20
Suggested Solution:

Part A
A non-current asset is classified as “held for sale” if its carrying amount will be recovered principally through a sale
transaction rather than through continuing use. For this to be the case,
(1) the asset must be available for immediate sale in its present condition and
(2) the sale must be highly probable. IFRS 5 lists the conditions which must be met if a sale is to be considered highly
probable.

• Management is committed to a plan to sell the asset;


• An active programme has been initiated to locate a buyer and complete the plan;
• The asset is being actively marketed at a sale price that is reasonable in relation to its current value;
• A completed sale is expected within one year from the date of classification (may be extended if any delay is caused
by circumstances beyond entity’s control); and
• It is unlikely that there will be any significant changes to the plan or that the plan will be withdrawn.

If these criteria are not satisfied at the end of the reporting period, the asset should not be classified as held for sale. If
the criteria are satisfied after the reporting period but before the financial statements are authorised for issue, the fact that
the asset is now classified as held for sale should be disclosed in the notes to the financial statements.

Part B
(a) A discontinued operation is a component of an entity that either has been disposed of, or is classified as held for
sale, and
o represents a separate major line of business or geographical area of operations,
o is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of
operations or
o is a subsidiary acquired exclusively with a view to resale.

Discontinued operations are presented separately at the end of profit or loss by including the profit after tax
generated by discontinued operations. This figure should include the post tax gain or loss on disposal of the assets
of the operation or the gain or loss on remeasurement following transfer to “held for sale”.

A component of an entity comprises operations and cash flows that can be clearly distinguished, operationally and
for financial reporting purposes, from the rest of the entity. In other words, a component of an entity will have been
a cash-generating unit or a group of cash-generating units while being held for use.

An entity shall not classify as held for sale a non-current asset (or disposal group) that is to be abandoned. This is
because its carrying amount will be recovered principally through continuing use.

Page 20
(b) Strawboy plc : Statement of Profit or Loss and Other Comprehensive Income for year ended:

31 July 2017 31 July 2016


€ million € million
Continuing operations:
Revenue 39 32
Cost of Sales (13) (11)
Gross profit 26 21
Operating costs (10) (8)
Profit for the year from continuing operations 16 13
Profit for the year from discontinued operations (see notes) (9.7) (2)
6.3 11
Notes:
The retail operation appears to meet the IFRS 5 criteria for recognition as a discontinued operation. Hence the
continuing and discontinued results should be separated in the SPLOCI.

The buildings would appear to meet the IFRS criteria for classification as “held for sale”. Hence they should be
recorded at their fair value less costs to sell, and the loss on transfer taken to profit or loss. This amount of €2.8
million is included with the loss from discontinued operations.

The other expected costs of closure should be provided for as the IAS 37 conditions for recognizing provisions for
restructuring costs appear to be met. These are:

(1) a detailed formal plan has been prepared and it is unlikely that it will be withdrawn, and
(2) this plan has been communicated to those affected.

Hence a provision of €3.9 million should be recognised within the loss for the year from discontinued operations.

Hence the total loss recognised in 2017 is:


Trading loss €3 million
Loss on transfer of buildings to “held for sale” €2.8 million
Provision for costs of closure €3.9 million
Total €9.7 million

Page 21
CORPORATE REPORTING
PROFESSIONAL 1 EXAMINATION - APRIL 2018

NOTES:
You are required to answer Questions 1, 2 and 3. You are also required to answer either Question 4 or 5.
Should you provide answers to both Questions 4 and 5, you must draw a clearly distinguishable line through
the answer not to be marked. Otherwise, only the first answer to hand for Question 4 or 5 will be marked.

Note: You have optional use of the Extended Trial


Balance, which if used, must be included in the answer booklet.

Provided are pro-forma:

Statements of Profit or Loss and Other Comprehensive Income By Expense, Statements of Profit or Loss
and Other Comprehensive Income By Function, and Statements of Financial Position.

TIME ALLOWED:
3.5 hours, plus 10 minutes to read the paper.

INSTRUCTIONS:
During the reading time you may write notes on the examination paper, but you may not commence
writing in your answer book. Please read each Question carefully.

Marks for each question are shown. The pass mark required is 50% in total over the whole paper.

Start your answer to each question on a new page.

You are reminded to pay particular attention to your communication skills, and care must be taken
regarding the format and literacy of your solutions. The marking system will take into account the
content of your answers and the extent to which answers are supported with relevant legislation, case
law or examples, where appropriate.

List on the cover of each answer booklet, in the space provided, the number of each question
attempted.

NB: PLEASE ENSURE TO ENCLOSE YOUR ANSWER SHEET TO QUESTION 3 IN THE


ENVELOPE PROVIDED.

The Institute of Certified Public Accountants in Ireland, 17 Harcourt Street, Dublin 2.


CORPORATE REPORTING
THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND

PROFESSIONAL 1 EXAMINATION – APRIL 2018

You are required to answer Questions 1, 2 and 3. You are also required to answer either Question 4 or 5.
Time allowed: 3.5 hours, plus 10 minutes to read the paper.

(If you provide answers to both questions 4 and 5 you must draw a clearly distinguishable line through the
answer not to be marked. Otherwise only the first answer encountered by the examiner for questions 4 or 5 will
be marked.)
You are required to answer Questions 1, 2 and 3.
1.
Statements of Financial Position as at 31 March 2018

Angela Plc Gerhard Plc Helmut Plc


€ million € million € million
Non-current assets:
Property, plant & equipment 2,300 600 100
Investments 1,500 50 5
3,800 650 105
Current assets:
Inventories 760 210 23
Trade receivables 440 150 13
Cash & bank 300 30 8
1,500 390 44
Total assets 5,300 1,040 149

Equity:
Equity share capital of €1 each 1,000 300 40
Share premium 500 100 20
Retained earnings: 2,750 500 61
4,250 900 121
Current liabilities:
Trade payables 570 80 18
Taxation 250 40 10
Dividends proposed 230 20 0
1,050 140 28
Total equity & liabilities 5,300 1,040 149

The following additional information is provided:

(i) Angela Plc (Angela) bought 10 million shares in Helmut Plc (Helmut) on 1 April 2016, at a cost of €25 million paid
in cash. On that date, the balance on the retained earnings reserve of Helmut stood at €37 million.
(ii) Angela bought 240 million shares in Gerhard Plc (Gerhard) on 1 October 2017. The consideration for the
purchase was €950 million. Of this amount, €750 million was paid in cash on the date of purchase, and payment
of the balance was deferred to 1 October 2018. The cash payment was recorded in the books of Angela, but no
entry was made to record the deferred element of the purchase price. On 31 March 2017, the retained earnings
reserve of Gerhard stood at €420 million. On 1 October 2017, the fair value of the non-controlling interest in
Gerhard was €200 million. Angela wishes to use the fair value method of calculating goodwill for all acquisitions.
(iii) On 1 October 2017, the fair values of the net assets of Gerhard were equal to their carrying values with the
exception of certain plant and equipment. This plant and equipment had a fair value €36 million in excess of the
carrying value at that date. No adjustment has been made to reflect this difference. The plant and equipment had
a 4 year remaining life at 1 October 2017.
(iv) At 31 March 2018, the goodwill of Gerhard was assessed for impairment, and it was agreed that an impairment
loss of €8 million would be recognised.
(v) During the post-acquisition period, Angela bought goods from Gerhard for a total sum of €40 million. These goods
cost Gerhard €35 million. 20% of the goods remained unsold by Angela at the reporting date.
(vi) At 31 March 2018, Angela had paid €2 million of the amount owing to Gerhard for goods purchased. The
remainder was included in trade receivables of Gerhard and trade payables of Angela.

Page 1
(vii) The dividends proposed by both companies were proposed at 31 March 2018. No dividend was paid by Gerhard
during the financial year. Angela has not recognised its share of Gerhard’s proposed dividend.
(viii) The cost of capital for Angela is 10% per annum. All profits are assumed to accrue evenly over the year.

All workings and solutions should be completed to the nearest €0.1 million.

REQUIREMENT:

(a) Prepare a Consolidated Statement of Financial Position for the Angela Group for year ended 31 March 2018 in
accordance with IFRS.
(22 marks)

(b) Discuss the concepts and accounting treatment of ‘deferred consideration’ and ‘contingent consideration’ in the
context of the acquisition of a subsidiary by a parent entity.
(8 marks)

[Total: 30 Marks]

Page 2
2. Emmanuel Plc is a company involved in the provision of services to construction companies. Its trial balance as
at ended 31 March 2018 is presented below:

Emmanuel Plc: Trial Balance as at 31 March 2018 Note Dr Cr


€m €m
Revenue (i) 450
Cost of Sales 160
Distribution costs 25
Administration expenses 185
Land and Buildings at valuation (ii) 200
Accumulated depreciation 1 April 2017 - buildings (ii) 20
Plant and equipment at cost (ii) 170
Accumulated depreciation 1 April 2017 - plant & equipment (ii) 50
Intangible assets at cost (iii) 80
Financial assets (iv) 64
Inventory 31 March 2018 42
Trade receivables 50
Cash at bank 60
Trade payables 30
Equity shares of €1 each 200
Share premium account 60
Revaluation surplus (ii) 40
Retained earnings reserve 136
Equity investment reserve (iv) 30
Provision for restoration costs (v) 20
1,036 1,036

The following additional information is provided:

(i) Revenue includes €10 million received as the agreed price from the sale of an item of plant and equipment. This
item cost €30 million and had been depreciated by €24 million up to 1 April 2017. No other entry was made in
respect of this transaction, except to record the amount of €10 million in cash and revenue.

(ii) The land and buildings figure represents the most recent valuation of €20 million for land and €180 million for
buildings.

Administration expenses include the following items in connection with the construction of a new building by
Emmanuel for its own corporate use:

• Construction materials €18 million


• Direct labour provided by Emmanuel €8 million
• Professional fees incurred €1 million
• Management time and overhead apportionment €1 million

A revaluation took place at 31 March 2018 revealing a valuation of €25 million for land and €210 million for
buildings, including the new building referred to above.

Buildings are depreciated at a rate of 2% of cost or valuation, with a full year’s charge in the year of acquisition
and none in the year of disposal.

Plant and equipment is depreciated at 25% reducing balance, with a full year’s charge in the year of acquisition
and none in the year of disposal.

All depreciation and amortisation is charged to cost of sales expense.

(iii) Intangible assets represent intellectual property assets developed and capitalised under IAS 38 - Intangible
Assets. It has been decided to commence amortising these assets in the current year, on a straight-line basis over
their useful economic life of 13 years. In addition, there was €11 million charged to administration expenses in
respect of the development of an additional patent, which was granted in 2017. This patent meets the IAS 38 -
Intangible Assets criteria for capitalisation and should be amortised as per the terms stated above.

Page 3
(iv) Financial assets consist of equity investments in respect of which the company has elected to recognise gains
and losses in fair value within Other Comprehensive Income (OCI). Any such gains and losses are taken to a
separate component of equity. On 31 March 2018, the fair value of the equity investments held was €58.5 million.

(v) A condition of the planning permission that was granted for the construction of one of the company’s buildings
was that the building be dismantled and the site restored at the end of its useful economic life. The estimated cost
of this was capitalised and recorded as a provision at its present value at the date of construction. The balance
for this provision, carried at €20 million, represents the carrying value at 1 April 2017. A discount rate of 5% was
used in its initial measurement. The building has several years of economic life remaining.

(vi) The directors estimate that the corporation tax liability for the year will be €7.5 million.

All workings and solutions should be calculated to the nearest €0.1 million.

REQUIREMENT:
Prepare the following for Emmanuel Plc:

(a) A Statement of Profit or Loss and Other Comprehensive Income for year ended 31 March 2018. (12 marks)

(b) A Statement of Changes in Equity for year ended 31 March 2018. (5 marks)

(c) A Statement of Financial Position as at 31 March 2018. (13 marks)

[Total: 30 Marks]

Page 4
3. The following multiple-choice question contains eight sections, each of which is followed by a choice of
answers. Only one answer is correct in each case. Each question carries equal marks. On the answer
sheet provided indicate for each question, which of the options you think is the correct answer. Marks will
be awarded for the correct answer except where you select more than one answer for any question.

REQUIREMENT:
Give your answer to each section on the answer sheet provided

1. Which of the following is NOT an ‘enhancing’ qualitative characteristic of financial information as identified by the
IASB’s Conceptual Framework?

(a) Prudence.
(b) Understandability.
(c) Comparability.
(d) Timeliness.

2. Liam Ltd. has a current ratio of 2.3:1, and an acid test (quick) ratio of 1.5:1. Which of the following statements
must be true regarding the financial position of Liam Ltd.?

(a) There is sufficient cash in the bank to meet short-term needs.


(b) Inventory is 0.8 times current liabilities.
(c) The company is carrying too much inventory.
(d) Inventory is 0.8 times current assets.

3. Liam Ltd. had a gross margin of 50% in 2017 as compared to 40% in 2016. Which of the following statements
must be true regarding the performance of Liam Ltd.?

(a) Sales revenue must have increased in 2017 over 2016.


(b) If sales revenue remained the same in both years, cost of sales must have increased in 2017 from 2016.
(c) If sales revenue decreased in 2017 over 2016, cost of sales must have decreased also.
(d) None of the above is certain to be true.

4. Liam Ltd. has a return on capital employed (ROCE) of 8%, and a return on equity (ROE) of 12%. Assuming no
taxation is incurred, which of the following statements must be true regarding the financial position of Liam Ltd.?

(a) The company has no borrowings.


(b) The cost of borrowing is less than or equal to 8%.
(c) The cost of borrowing is greater than 8% but less than 12%.
(d) The cost of borrowing is greater than or equal to 12%.

5. According to IAS 7 - Statements of Cash Flow, under which heading in the Statement of Cash Flows should cash
payments to acquire property plant and equipment be included?

(a) Cash Flows from Operating Activities.


(b) Cash Flows from Investing Activities.
(c) Cash Flows from Financing Activities.
(d) None of the above.

Page 5
6. At 31 March 2017, Fred Ltd carried a provision in its books for €3.2 million. This represented the expected cost
of a restructuring announced earlier in March. This was communicated to all affected parties. During the year
ended 31 March 2018, restructuring costs of €1.5 million were incurred and charged to administrative expenses.
The estimate of costs remaining to complete the restructuring at 31 March 2018 was €1 million. What adjustment
should be made at 31 March 2018 to reflect the current estimate?

(a) Debit provision and credit profit or loss with €2.2 million.
(b) Debit provision and credit profit or loss with €1.5 million.
(c) Debit provision and credit profit or loss with €1 million.
(d) Debit profit or loss and credit provision with €1 million.

7. Which of the following are biological assets, as defined by IAS 41 - Agriculture?

(a) Laboratory equipment.


(b) Agricultural equipment and machinery.
(c) Harvested agricultural produce.
(d) Agricultural crops prior to harvest.

8. According to IAS 33 - Earnings per Share, what is the theoretical ex-rights price of a share?

(a) The share’s market price immediately before any rights issue.
(b) The price charged by a company for any new shares issued during a rights issue.
(c) The price at which shares are expected to trade following completion of a rights issue.
(d) The price at which a shares should trade, in the opinion of company management.

[Total: 20 marks]

Page 6
Answer either Question 4 or Question 5
4. IFRS 15 - Revenue from Contracts with Customers was issued in May 2014, and is effective for accounting
periods beginning on or after 1 January 2018. However, early adoption is permitted. The IFRS requires a 5-step
approach to determining the amount of revenue to be recognised by an entity.

(i) On 31 March 2018, Derek Plc signed a contract to supply 500 units of product at an agreed price of €1,000
per unit. 300 units were delivered at that date, with the remainder to be delivered on 1 June 2018. It was
agreed that the customer would have extended credit terms of 12 months from the date of delivery. Derek
Plc’s cost of capital is 10%.

(ii) During the year ended 31 March 2018, Derek Plc took payment in advance for the supply of 2,000 hotel
room-nights to customers at €100 per room per night. Only 400 of these had been occupied by 31 March
2018. The amounts paid by the customers are non-refundable unless the company fails to provide the
agreed accommodation.

Assume Derek Plc has decided to adopt IFRS 15 for year ended 31 March 2018.

REQUIREMENT:

(a) Outline the general principles and the 5-step approach to recognising revenue as set out by IFRS 15 - Revenue
from Contracts with Customers.
(10 marks)

(b) In each scenario above, calculate the amount of revenue to be recognised in the financial statements of Derek
Plc for year ended 31 March 2018. Show the journal entries required to record each transaction. Justify your
answer in each case.
(10 marks)

[Total: 20 Marks]

OR
5. IAS23 - Borrowing Costs sets out the conditions that must be met in order to capitalise borrowing costs incurred
by entities purchasing or constructing non-current assets.

(i) Henry Plc commenced construction of a non-current asset on 1 June 2017. On 1 July 2017, it borrowed €5 million
at an annual interest rate of 8% to finance the development. On 15 November 2017, the workers went on strike
and no work was done until the dispute was settled on 15 December 2017. The project was still in progress at 31
March 2018. Interest was paid monthly in arrears.

(ii) Georgina Plc drew down a loan of €2 million on 1 April 2017 to part-finance the construction of a new building.
The rate of interest applicable was 6% per annum. Building commenced on 1 April 2017, but no money was spent
until 30 June 2017 when the construction company were paid their first instalment of €1.2m. The €2m borrowed
was invested for 3 months (April – June) in government bonds carrying an annual interest rate of 2%. Once the
construction company was paid, the remaining €0.8m was placed with a bank on deposit at a rate of 3% per
annum. This was withdrawn on 30 September 2017 and spent on the development. The asset was completed on
30 November 2017.

REQUIREMENT:
(a) Discuss the conditions that must be met in order to capitalise borrowing costs under IAS 23 - Borrowing Costs.
Your answer should set out when the capitalisation of borrowing costs should commence, be suspended, and
cease.

(8 marks)

(b) In the case of (i) and (ii) above, recommend the accounting treatment as required by IAS 23. Show any journal
entries necessary to record the transactions.
(12 marks)

[Total: 20 Marks]

END OF PAPER
Page 7
SUGGESTED SOLUTIONS

CORPORATE REPORTING
THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND

PROFESSIONAL 1 EXAMINATION – APRIL 2018

Solution 1

(a) Group structure:


Angela has 80% (controlling) equity in Gerhard, bought 6 months prior to the reporting date. NCI 20%.
Angela has 25% equity in Helmut, bought 2 years ago. In accordance with IAS 28 it is presumed Helmut is
an associate as between 20% and 50% of the voting equity is held by the parent.

Angela Plc: Consolidated statement of financial position of as at 31 March 2018


€ million
Non-current assets:
Property, plant and equipment (2,300 + 600 + 31.5 (W5)) 2,931.5
Goodwill W1 227.8
Investment in Associate W4 31.0
Financial Assets (1,500 - 25 - 750 + 50) 775.0
3,965.3
Current assets:
Inventories (760 + 210 – 1.0 (W7)) 969.0
Trade receivables (440 + 150 - 38 (W8)) 552.0
Cash & bank (300 + 30) 330.0
1,851.0
Total assets 5,816.3
Equity:
Equity shares 1,000.0
Share premium 500.0
Retained earnings W2 2,784.1
4,284.1
Non-controlling interest W3 205.3
4,489.4

Current liabilities:
Trade payables (570 + 80 - 38 (W8) 612.0
Deferred consideration W6 190.9
Dividends proposed W9 234.0
Current taxation (250 + 40) 290.0
1,326.9
Total equity & liabilities 5,816.3

W1 - Goodwill on acquisition of Gerhard € million


Cost of investment:
Cash 750.0
Deferred consideration (W6) 181.8
931.8
Value of NCI at acquisition (ii) 200.0
Fair value of net assets at acquisition
Equity share capital 300
Share premium 100
Retained earnings (see note 1 below) 460
Fair value adjustment (iii) 36 (896.0)
Goodwill 235.8
impairment loss (iv) (8.0)
Balance to consolidated SOFP 227.8

Page 8
Note 1: Retained earnings of Gerhard at acquisition are calculated as follows:
Balance at 31 March 2017 420.0
Earnings to 1 October 2017 (6 months) (500 - 420) * 6/12 40.0
Balance at 1 October 2017 460.0

Note 2: Goodwill impairment is charged to Gerhard’s R/E so both parent and NCI suffer their share. This is
appropriate as the original calculation of NCI at acquisition used the fair value method.

Alternatively, Group R/E could be charged with 80% of the impairment loss, and NCI with 20%.

W2 Retained earnings Angela Gerhard


€ million € million
Balance at reporting date 2,750.0 500.0
less balance at acquisition (460.0)
goodwill impairment (iv) (8.0)
Depreciation on fair value adjustment (4.5)
Unwinding of discount on deferred consideration (9.1)
Share of R/E of Associate 6.0
Unrealised profit on intra-group trading (1.0)
Dividend receivable from Gerhard (W9) 16.0 0.0
Subtotals 2762.9 26.5
Consolidate Gerhard (80% * 27.4) 21.2
Balance to SOFP 2,784.1

W3 - Non-controlling Interest Gerhard


€ million
Balance at acquisition (W1) 200.0
Share of retained earnings of Gerhard (20% * 26.5) 5.3
Balance to SOFP 205.3

W4 - Investment in Associate Helmut


€ million
Balance at acquisition (i) 25.0
Share of post-acquisition earnings (61 - 37) * 25% to Angela's R/E 6.0
Balance to SOFP 31.0

W5 - Fair value adjustment € million


Balance at acquisition to goodwill working 36.0
Depreciation since acquisition 36 / 4 years *6/12 to R/E (4.5)
Balance at reporting date to SOFP 31.5

W6 - Deferred consideration € million


Agreed amount of deferred consideration (payable 1 year following acquisition) 200.0
Discounted value at acquisition date 200 / 1.1 (to Goodwill) 181.8
Discount unwound by reporting date (181.8 * 10%) * 6/12 (to R/E) 9.1
Carrying value of liability at reporting date 190.9

W7 - Intra-group trading € million


Total profit on trade (40 - 35) 5.0
Proportion relating to goods still in group inventory at R/D 20%
Unrealised profit Deduct from R/E of seller 1.0
Deduct from group inventory

W8 - Intra-group balances outstanding € million


Balance owed from Angela to Gerhard at reporting date 38.0
Eliminate this by reducing trade receivables and trade payables by 38.
Page 9
W9 - Dividends proposed € million
Angela's liability 230.0
Gerhard's liability 20.0
Intragroup dividends 20 * 80% to Angela's R/E (16.0)
Balance to SOFP liability 234.0

(b) Explain deferred consideration:


Deferred consideration arises when an acquisition agreement provides that some of the payment due for the
acquired entity will be paid to the seller at a later date. The amount is agreed in advance. This may be to
assist with the cash flow management of the purchaser, or as a way for the purchaser to ensure any
misrepresentations by the seller can be compensated for in the future more easily.

Accounting treatment of deferred consideration:


Deferred consideration must be recognised by the purchaser at the acquisition date at its fair value. This is
normally the agreed cash amount discounted to the acquisition date at the purchaser’s cost of capital. The
discount is unwound over time by the purchaser, by recognising it as a finance cost in the post-acquisition
period as time passes. The liability at any reporting date will be the initial fair value plus the amount of the
discount that has unwound to date.

Explain contingent consideration:


Contingent consideration is when the seller and purchaser agree that a portion of the consideration be
measured and paid in the future, but at the acquisition date the amount is subject to uncertainty. The amount
is often dependant on the future performance of the acquired entity. For example, a further €100 million may
be paid to the seller 2 years after acquisition provided profits exceed a stated figure in each of the two years.

Accounting treatment of contingent consideration:


Any contingent consideration must also be recognised at acquisition at its fair value. This will normally include
a discount to reflect the time delay before payment, plus a discount to reflect the probability that the amount
will be paid in part or in full. Goodwill is calculated based on this estimate. At each reporting date after
acquisition, the fair value is re-estimated, with any change being taken to profit or loss (of the purchaser) in
the year of re-estimation. Any change due to the unwinding of the time value of money discount is recognised
as a finance cost. The revised amount is carried as a liability until further re-estimated, or paid.

Marking Scheme:
(a)
Basic consolidation (100% Angela + 100% Gerhard) 2
Calculation and treatment of goodwill (including NCI at acquisition date) 2
Subsequent treatment of deferred consideration 2
Investment in associate calculation and subsequent movement 2
Fair value adjustments and post acq movements 2
Intra group sales of inventory 2
Elimination of intra-group receivables and payables 2
Dividends 2
Reserves calculation and consolidation - both 2
NCI calculation at reporting date 2
Presentation 2
Subtotal 22

(b)
Explanation of deferred consideration 2
Accounting for deferred consideration 2
Explanation of contingent consideration 2
Accounting for contingent consideration 2
Subtotal 8

Total 30

Page 10
Solution 2
Marking scheme:
(a) Statement of Profit or Loss and Other Comprehensive Income
Transfer of figures from trial balance to appropriate headings 1
Removal of proceeds from sale of plant from revenue 1
Depreciation on buildings (calculation and inclusion in cost of sales expenses) 1
Depreciation on plant & equipment 1
Amortisation of intangibles 1
Capitalisation of buildings cost (calculation and exclusion from admin expenses) 1
Capitalisation of intangible cost (and exclusion from admin expenses) 1
Gain on disposal of Plant 1
Adjustment to finance costs re unwinding of discount on restoration provision 1
Tax (recognition in P/L) 0.5
Calculation and presentation in OCI of gain on revaluation of buildings 1
Presentation of loss on remeasurement of equity investments within OCI 1
Presentation 0.5
Subtotal 12

(b) Statement of Changes in Equity


Opening balances 1
Transfer of figures from SPLOCI to correct reserves 3
Presentation 1
Subtotal 5

(c) Statement of Financial Position


Transfer of figures from trial balance to appropriate headings 2
Land & buildings 2
Plant & equipment 2
Intangible assets 2
Loss on equity investments (calculation and recognition in NCA) 1
Transfer of figures from SOCIE to reserves 1
Tax (recognition as liability) 0.5
Restoration provision (calculation and inclusion of correct amount in liabilities) 2
Presentation 1
Subtotal 13.5 max 13
Total 30

(a) Emmanuel Plc: Statement of Profit or Loss and Other Comprehensive Income
for year ended 31 March 2018
€ million
Revenue (450 - 10 (W1)) 440.0
Cost of Sales (160 + 4.1 (W2) + 28.5 (199.6)
Gross profit (W2) + 7(W3) 240.4
Distribution costs (25) (25.0)
Administration expenses (185-27 (W2) - 11 (W3) (147.0)
Finance costs W5 (1.0)
Gain on disposal of plant & equipment W1 4.0
Profit before tax 71.4
Tax W6 (7.5)
Profit for the year 63.9

Other comprehensive income (items that will not be reclassified to profit or loss):
Gain on revaluation of land & buildings (W2) 32.1
Loss on revaluation of equity investments (W4) (5.5)
Other comprehensive income for the year 26.6
Total comprehensive income for the year 90.5

Page 11
(b) Emmanuel Plc Statement of Changes in Equity for year ended 31 March 2018

Share Share Revaluation Equity Retained Total


Capital Premium Surplus Investments Earnings Equity
€ million € million € million € million € million € million
Balance 1 April 2017 200 60.0 40 30 136 466
Profit / OCI for the year 0 0.0 32.1 (5.5) 63.9 90.5
Balance 31 March 2018 200 60 72.1 24.5 199.9 556.5

(c) Emmanuel Plc Statement of Financial Position as at 31 March 2018 € million

Non-current assets:
Land & buildings, W2 235.0
Plant & equipment (170 - 30 (W1)) - (50-24 (W1) +28.5 (W2)) 85.5
Intangible assets (80 + 11 (W3) - 7 (W3)) 84.0
Equity investments (64-5.5 (W4)) 58.5
463.0
Current assets:
Inventory (42 42.0
Trade receivables (50 50.0
Cash & bank (60 60.0
152.0
Total assets: 615.0

Equity:
Equity share capital (b) 200.0
Share premium (b) 60.0
Revaluation surplus (b) 72.5
Equity investment reserve (b) 24.5
Retained earnings (b) 199.5
556.5
Current liabilities:
Trade payables (30 30.0
Provision for restoration costs (20 + 1 (W5) 21.0
Corporation tax due W6 7.5
58.5
Total equity & liabilities 615.0

Workings:
W1 – Revenue
This item should not be included in revenue, as revenue should consist of goods sold in the ordinary
course of business. The sale of a non-current asset does not fall into this category.
The asset and its accumulated depreciation should be derecognised, and a profit or loss on disposal
calculated.
€ million € million
Cost of item sold 30
Accumulated depreciation to date of sale (none in year of sale) (24)
Carrying value at date of sale 6
Proceeds 10
Profit on disposal 4

Adjustment:
Dr Revenue 10
Dr Accumulated depreciation plant & equipment 24
Cr Plant & equipment at cost 30
Cr profit or loss (gain on disposal) 4

Page 12
W2 – Non-current assets
New building:
The additional expenditure directly incurred on construction of new buildings should be capitalised to land
& buildings. This amounts to €27 million as management time and apportioned overhead are not
considered direct costs under IAS 16. Hence:
€ million € million
Dr Land & buildings 27
Cr Administration expenses 27

Depreciation of land & buildings:


As the revaluation took place on the last day of the year, depreciation should be calculated for the year
on buildings only based on the existing values. The new building should be included because a full year’s
depreciation is provided in the year of acquisition.
€ million
Buildings at valuation (per T/B less land 200-20) 180
Cost of new building (as calculated above) 27
Base for depreciation charge 207
Depreciation (2% of cost or valuation = 2% * 207m): 4.14
Hence:
€ million € million
Dr Cost of sales 4.1
Cr Accumulated depreciation: land & buildings 4.1

Revaluation of land & buildings:


At 31 March 2018, the land & buildings were revalued as follows: Land Buildings
Revalued amount (per note (ii)): 25 210
Carrying amount after depreciation and new building (see below) (20) (182.9)
Revaluation gain (to OCI) 5 27.1

Carrying amount of buildings prior to revaluation


Previous valuation (200 – 20 for land) 180
Cost of new building 27
Accumulated depreciation to 31 March 2017 (20)
Depreciation for year ended 31 March 2018 (calculated above) (4.1)
Carrying value prior to revaluation 182.9

We should eliminate all accumulated depreciation, and show the land and buildings at their new carrying
value of €235 million, up from their existing valuation + cost (of 200 + 27).
Hence:
€ million € million
Dr Accumulated depreciation (20 + 4.1) 24.1
Dr Land & buildings (235 – 227) 8
Cr Other comprehensive income 32.1

Depreciation of plant & equipment:


€ million
Plant & equipment at cost (per T/B less plant disposal) (170 – 30) 140
Accumulated depreciation to 31 March 2017 less disposal (50 – 24) (26)
Base for depreciation charge 114
Depreciation (25% of NBV = 25% * 114m): (28.5)

Hence:
€ million € million
Dr Cost of sales 28.5
Cr Accumulated depreciation: plant & equipment 28.5

Page 13
W3 – Intangible assets
Additional intangible
The €11 million charged to administration expenses should be capitalised as an intangible as it meets the
criterial for capitalisation. Hence:
€ million € million
Dr Intangible assets 11
Cr Administration expenses 11

Amortisation
The entire amount should now be amortised over the useful economic life of 13 years. Amount of
amortisation (80 + 11) / 13 years = €7 million.
Hence:
€ million € million
Dr Cost of Sales 7
Cr Accumulated amortisation – intangible assets 7

W4 – Financial assets
Under IFRS 9, equity investments should be classified as “Fair Value” financial instruments, and
remeasured to fair value at each reporting date. Any resulting gains or losses are taken to profit or loss
unless the entity makes an irrevocable election to take them to OCI. This election has been made by
Angela, hence the loss in value of €5.5 million (58.5 – 64) should be taken to OCI as well as being
reflected in the carrying value of the equity investments.
Hence:
€ million € million
Dr Other comprehensive income 5.5
Cr Financial assets 5.5

W5 – Restoration provision
The current liability needs to be updated at each reporting date to reflect the unwinding of the discount
originally recognised in measuring the fair value of the provision required.
Amount unwinding in year ended 31 March 2018 (20m * 5%) €1 million

As the existing provision is recorded at €20 million, an additional charge of €1 million must be made,
bringing the provision up to €21 million. This should be charged to profit or loss (through finance costs),
and added to the existing provision.
Hence:
€ million € million
Dr Profit or loss – finance costs 1
Cr Provision for restoration costs 1

W6 – Tax liability
The estimate should be incorporated into the financial statements.
Hence:
€ million € million
Dr Profit or loss (taxation) 7.5
Cr Current liability (tax payable) 7.5

Page 14
SOLUTION 3
Each correct answer gains 2.5 marks. No partial marks are awarded. Workings are not marked.

1 Answer (a)
The others are all explicitly stated to be enhancing characteristics.

2. Answer (b)
The acid test ratio is (current assets – inventory) as a ratio of current liabilities. Hence the difference
between them of 0.8:1 is entirely due to the exclusion of inventory. Hence inventory must be 0.8 times
current liabilities.

3. Answer (c)
If sales revenue decreased in 2017, the only way the gross margin could increase is if cost of sales fell by a
greater amount than sales revenue.

4. Answer (b)
As the ROCE is a blend of the ROE and the cost of debt, ROCE will be a weighted average of both. If ROE
is higher, this means that the cost of debt is below the average.

5. Answer (b)
The cost of acquiring non-current assets is always included under “investing activities”.

6. Answer (a)
The provision should be adjusted to the required amount. This is a reduction from €3.2 million to €1.0
million, or €2.2 million debited to the provision. The credit is to profit or loss.

7. Answer (d)
Biological assets are those assets that are growing naturally. Once they are harvested, they cease to be
biological assets and become normal inventory, accounted for under IAS 2.

8. Answer (c)
The TERP is the expected price at which a share will trade after a rights issue, taking into account its
actual price before the rights issue together with any dilution arising from the rights issue itself.

Page 15
SOLUTION 4

Marking Scheme:
(a) 10 correct points, including the 5 steps, at 1 mark each
Subtotal 10

(b)
(i) Recognition that total revenue recognised is based on goods delivered by the reporting date 1
Recognition that the deferred payment requires a present value to be calculated 1
Accurate calculations and journal entry 3

(ii) Recognition that revenue recognised is based on rooms actually occupied 1


Recognition that a deferred revenue account is used for remainder 1
Accurate calculations and journal entry 3
Subtotal 10

Total 20

(a) Revenue is recognised when an entity satisfies a performance obligation by transferring a promised good
or service to a customer. However, a good or service is only considered transferred when the customer
obtains control of that good or service.

This is an asset/liability-driven approach, consistent with the Conceptual Framework.

This approach has 5 steps:

(1) Identify the contract with the customer;


Agreement between the parties;
Each party’s rights can be identified;
Payment terms can be identified;
The contract has commercial substance;
It is probable the consideration will be collected.

(2) Identify the performance obligation(s);


May be single or multiple performance obligations;
If multiple, each portion capable of being sold separately is identified.

(3) Determine transaction price;


Agreed price;
Probability weighted expected price if uncertain;
Should be net of expected rebates and discounts;
Should include the effect of the customer’s credit rating and time value of money if relevant.

(4) Allocate transaction price to performance obligations;


Only relevant if multiple deliverables exist in the contract;
The transaction price is allocated to the deliverables in the ratio of the stand alone selling prices of
each individual deliverable.

(5) Recognise revenue when performance obligation satisfied.


This is normally when control is transferred to the customer;
Control may be transferred at one point in time, or over a period of time;

If a performance obligation is delivered over time, revenue is only recognised if ONE OF the following
criteria is met:

• The customer consumes the service as it is supplied;


• The customer controls the asset as it is created in stages;
• The entity’s performance does not create an asset with alternative uses to the entity, and the entity
has an enforceable right to payment for work completed.
• The entity must be reasonably able to assess the outcome of the performance

Page 16
Revenue shall be measured at the fair value of the consideration received or receivable. Fair value is the
price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date (ie an exit price) (IFRS 13).

Further issues
• Selling costs directly incurred in earning a sales contract are capitalised and recognised over the
period revenue from that contract is recognised. Example – sales commission for a 12 month phone
service contract.
• Costs incurred in meeting the terms of a contract are capitalised and recognised against revenue
provided they relate directly to an identifiable contract, help satisfy the obligations under the contract,
and are expected to be recovered.
• Goods expected to be returned are not to be recognised as revenue. An estimate should be made of
the amount expected to be returned.
• A warranty is often a separate deliverable in a sales contract. As such it is treated as a component of
the deal. The revenue is separated, and the portion relating to the warranty is recognised over the
warranty period. If the warranty is inseparable from the goods supplied (i.e. is not separately
available, then a provision is made under IAS 37.
• If goods are sold as agent rather than as principal, only the commission receivable is recognised as
revenue.
• If a sales contract grants the purchaser an option to purchase further goods / services at a discount,
this is treated as a separate performance obligation. Example – air miles, discount coupons. The fair
value is estimated and revenue recognised on delivery or expiry.
(10 marks)
(b)
(i) The contract to supply is not sufficient to recognise revenue. It is necessary that control of the goods have
actually transferred to the customer. This is the case for 300 units.

The deferred payment does not prevent revenue from being recognised, but the consideration needs to be
measured at the fair value, on the transaction date, of the amount receivable. The fair value needs to reflect
a discount allowing for the time value of money, as a result of the extended credit period. The discount rate
will be 10%, Derek’s cost of capital.

Hence revenue will be recognised as follows: 300 units * €1,000 * 1/1.10 = €272,727

The discount will be recognised as finance income as time passes, on a time-apportioned basis. As the
sale took place on 31 March 2018, no time has yet passed to trigger the recognition of finance income.

Journal: € €
Dr trade receivables 272,727
Cr Revenue 272,727
(recognition of revenue and trade receivables at fair value of consideration receivable)
(5 marks)

(ii) Again, the same principles apply. Revenue is recognised when control of the goods or services are
transferred to the customer.

Here, cash was received in advance. Nevertheless, revenue is only recognised when the service is
delivered to the customer. Any excess cash retained is recognised as deferred income, a liability.

If the cash is non-refundable, this does not change the timing of recognition of revenue. However, if the
customer’s right to the service expires, and the customer has no right to a refund, the revenue should then
be recognised.

Total cash received in year ended 31 March 2018: 2000 * €100 = €200,000
Total room nights provided 400
Revenue recognised = 400 * €100 = €40,000
Deferred revenue = 200,000 – 40,000 = 160,000

Journal: € 000 € 000


Dr Cash 200
Cr Revenue 40
Cr Deferred revenue 160
(recognition of revenue, deferred revenue and cash received)
(5 marks)
[Total: 20 MARKS]
Page 17
SOLUTION 5

Marking Scheme:
(a) 8 valid points at 1 mark each
Subtotal 8

(b)
(i) Calculation of interest incurred 2
Calculation of amount to capitalise 2
Journals 2

(ii) Calculation of interest incurred 1


Calculation of interest earned on investment 1
Calculation of amount to capitalise 2
Journals 2
Subtotal 12

Total 20

(a) Most borrowing costs are treated as an expense as incurred. However a special case exists in the case of
interest paid on money borrowed to bring a substantial asset into use.

The required treatment is to capitalise such borrowing costs as part of the cost of the asset subject to the
following conditions:
• The asset takes a substantial period of time to get ready for its intended use (or sale);
• The borrowing costs can be reliably measured;
• Only costs incurred up to the time the asset is substantially ready for use may be considered for
capitalisation.
• To the extent that funds are borrowed specifically for the purpose of obtaining a qualifying asset, the
amount of borrowing costs eligible for capitalisation on that asset shall be determined as the actual
borrowing costs incurred on that borrowing during the period less any investment income on the
temporary investment of those borrowings.
• If general borrowed funds are used to purchase an asset, then an average borrowing rate may be
applied to expenditures on the asset, provided the total borrowing costs capitalised do not exceed
the total borrowing costs incurred.
• The capitalised cost of any asset cannot exceed its recoverable amount (see IAS 36).

Commencement, suspension and cessation of capitalisation


The capitalisation of borrowing costs as part of the cost of a qualifying asset shall commence when:
• expenditures for the asset are being incurred;
• borrowing costs are being incurred; and
• activities that are necessary to prepare the asset for its intended use or sale are in progress.

Capitalisation of borrowing costs shall be suspended during extended periods in which active development
is interrupted.

Capitalisation of borrowing costs shall cease when substantially all the activities necessary to prepare the
qualifying asset for its intended use or sale are complete.
(8 marks)

(b)
(i) Henry Plc will capitalise the interest incurred when:
• expenditures for the asset are being incurred;
• borrowing costs are being incurred; and
• activities that are necessary to prepare the asset for its intended use or sale are in progress.

Interest is incurred for 9 months from 1 July 2017 until 31 March 2018.
Amount incurred was €5 million * 8% * 9/12 = €300,000.
Expenditures are being incurred from 1 June 2017, so the commencement precedes the raising of the
loan.

Page 18
Activities necessary to prepare the asset for use are ongoing throughout this period except for one month
when the workers were on strike.

Hence all three conditions were met for 8 months of the year. Hence we should capitalise €300,000 * 8/9,
and expense €300,000 * 1/9.

Journal:
31 March 2018 Dr Non-current assets €266,667
Dr Profit or loss €33,333
Cr Cash €300,000

(6 marks)

(ii) Georgina Plc will capitalise the interest incurred when:

• expenditures for the asset are being incurred;


• borrowing costs are being incurred; and
• activities that are necessary to prepare the asset for its intended use or sale are in progress.

Interest is incurred for 12 months from 1 April 2017 until 31 March 2018.
Amount incurred was €2 million * 6% = €120,000.
Expenditures are being incurred from 1 April 2017 to 30 November 2017 (8 months).
Activities necessary to prepare the asset for use are ongoing throughout this period.

Hence all three conditions were met for 8 months of the year. The interest incurred during this period was
€120,000 * 8/12, or €80,000. The balance is expensed to profit or loss (€40,000).

However, interest income from temporary investment should be netted against the amount capitalised, as it
was earned during this period. Interest received amounted to:

• €2 million @ 2% * 3/12 = €10,000; plus


• €0.8 million @ 3% * 3/12 = €6,000

Total interest received €16,000.

Journal:
31 March 2018 Dr Non-current assets (80-16) €64,000
Dr Profit or loss €40,000
Cr Cash €104,000

(6 marks)

[Total: 20 MARKS]

Page 19
CORPORATE REPORTING
PROFESSIONAL 1 EXAMINATION - AUGUST 2018

NOTES:
You are required to answer Questions 1, 2 and 3. You are also required to answer either Question 4 or 5.
Should you provide answers to both Questions 4 and 5, you must draw a clearly distinguishable line through
the answer not to be marked. Otherwise, only the first answer to hand for Question 4 or 5 will be marked.

Provided are pro-forma:

Statements of Profit or Loss and Other Comprehensive Income By Expense, Statements of Profit or Loss
and Other Comprehensive Income By Function, and Statements of Financial Position.

TIME ALLOWED:
3.5 hours, plus 10 minutes to read the paper.

INSTRUCTIONS:
During the reading time you may write notes on the examination paper, but you may not commence
writing in your answer book. Please read each Question carefully.

Marks for each question are shown. The pass mark required is 50% in total over the whole paper.

Start your answer to each question on a new page.

You are reminded to pay particular attention to your communication skills, and care must be taken
regarding the format and literacy of your solutions. The marking system will take into account the
content of your answers and the extent to which answers are supported with relevant legislation, case
law or examples, where appropriate.

List on the cover of each answer booklet, in the space provided, the number of each question
attempted.

NB: PLEASE ENSURE TO ENCLOSE YOUR ANSWER SHEET TO QUESTION 3 IN THE


ENVELOPE PROVIDED.

The Institute of Certified Public Accountants in Ireland, 17 Harcourt Street, Dublin 2.


CORPORATE REPORTING
THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND

PROFESSIONAL 1 EXAMINATION – AUGUST 2018

You are required to answer Questions 1, 2 and 3. You are also required to answer either Question 4 or 5.
Time allowed: 3.5 hours, plus 10 minutes to read the paper.

(If you provide answers to both questions 4 and 5 you must draw a clearly distinguishable line through the
answer not to be marked. Otherwise only the first answer encountered by the examiner for questions 4 or 5 will
be marked.)
You are required to answer Questions 1, 2 and 3.

1. Below are statements of financial position for three companies as at 31 July 2018.

Statements of Financial Position as at 31 July 2018

Patrick Plc Sally Plc Frank Plc


€ million € million € million
Non-current assets:
Property, plant and equipment 4,860 2,100 1,530
Investments 4,450 750 250
9,310 2,850 1,780
Current assets:
Inventories 1,350 460 375
Trade receivables 1,720 520 125
Cash & bank 460 130 80
3,530 1,110 580

Total assets 12,840 3,960 2,360

Equity:
Equity share capital of €1 each 5,000 1,500 800
Revaluation surplus 3,000 1,200 500
Retained earnings 1,790 1,000 950
9,790 3,700 2,250
Current liabilities:
Trade payables 1,430 100 70
Taxation 940 120 40
Dividends proposed 680 40 0
3,050 260 110

Total equity and liabilities 12,840 3,960 2,360

The following additional information is provided:

(i) Patrick Plc (Patrick) bought 900 million shares in Sally Plc (Sally) on 1 August 2016, at a cost of €2.50 per share
paid in cash. On that date, the balance on the retained earnings reserve of Sally stood at €600 million, and the
revaluation surplus was zero. At the date of acquisition, the net assets of Sally were equal to their carrying values
except for certain items of property, plant and equipment, which had a fair value €400 million in excess of their
carrying value. Patrick has had a policy of carrying property, plant and equipment at fair values. This policy is
implemented across all group companies from the date of acquisition. Hence, the fair values were incorporated
into the books of Sally at the acquisition date, and depreciation provided for appropriately.

(ii) Patrick bought 640 million shares in Frank Plc (Frank) on 1 August 2017. The consideration for the purchase was
€3 per share in cash. In addition, it was agreed that a further payment of €1 per share would be made on 31 July
2019 provided certain profit targets were met. The fair value of this component of the consideration was €400
million on 1 August 2017, and €520 million on 31 July 2018. The cash payment was recorded in the books of
Patrick, but no entry was made to record the contingent element of the purchase price. On 1 August 2017, the
retained earnings reserve of Frank stood at €830 million, and the revaluation surplus at €450 million. Frank has

Page 1
always had a policy of measuring property, plant and equipment at fair value, hence the carrying values of these
assets were equal to their fair values at the acquisition date. However, Frank controls a famous brand name, not
recognised in its books, which had a fair value of €50 million on 1 August 2017. This brand was estimated to have
a useful economic life of 20 years from that date.

(iii) Patrick wishes to use the fair value method to measure the non-controlling interests of Sally at the acquisition
date. The share price of €2.50 should be used for this purpose. Patrick wishes to use the proportion of net assets
method to measure the non-controlling interests of Frank at the acquisition date.

(iv) At 31 July 2018, goodwill was assessed for impairment, and the calculation showed that an impairment loss of
€200 million would be recognised in the case of Sally, and €150 million in the case of Frank. No impairment
losses had been recognised in the year to 31 July 2017.

(v) During the year, Sally bought goods from Frank for a total sum of €20 million. These goods cost Frank €15 million.
60% of the goods remained unsold by Sally at the reporting date.

(vi) The dividends by both companies were proposed at 31 July 2018. No dividend was paid by any company during
the financial year. Patrick has not recognised its share of Sally’s proposed dividend.

(vii) All workings and solutions should be completed to the nearest €0.1 million.

REQUIREMENT:

(a) Outline how intra-group dividends should be accounted for in the Consolidated Statement of Profit or Loss and
Other Comprehensive Income, and in the Consolidated Statement of Financial Position.
(5 marks)

(b) Prepare a Consolidated Statement of Financial Position for the Patrick Group for year ended 31 July 2018 in
accordance with IFRS.
(23 marks)
Presentation (2 marks)

[Total: 30 Marks]

Page 2
2. Jolene Plc is a public listed manufacturer. The group’s summarised consolidated financial statements for the year
ended 31 July 2018 (with 2017 comparatives) are as follows::

Jolene Plc: Consolidated Statements of Profit or Loss and Other Comprehensive Income for the years
ended 31 July:

2018 2017
€ million € million
Revenue 9,650 8,790
Cost of sales (4,900) (5,750)
Gross profit 4,750 3,040
Operating expenses (3,756) (3,020)
Gains on revaluation of financial assets 26 40
Finance costs (49) (33)
Profit (loss) before taxation 971 27
Income tax expense (80) 0
Profit for the year 891 27

Profit for the year attributable to:


Owners of the parent 876 27
Non-controlling interests 15 -
Profit for the year 891 27

Jolene Plc: Consolidated Statements of Financial Position as at 31 July:


2018 2017
€ million € million
Non-current assets:
Property, plant and equipment 3,680 2,400
Intangible assets 330 350
Goodwill 60 0
Financial assets 210 180
4,280 2,930
Current assets:
Inventory 400 275
Trade receivables 460 340
Bank --- 230
860 845

Total assets 5,140 3,775

Equity:
Equity shares of €1 each 1,400 1,200
Share premium 500 350
Retained earnings 1,796 1,305
3,696 2,855
Non-controlling interest 50 0
3,746 2,855
Non-current liabilities:
6% bonds 2021 680 550
680 550

Current liabilities:
Trade payables and provisions 466 280
Bank overdraft 168 0
Current tax payable 80 90
714 370

Total equity and liabilities 5,140 3,775

Page 3
The following notes should be taken into account::

(i) On 1 December 2017, Jolene bought an 80% stake in another entity, Marlene Plc. The cost of this stake was €200
million, satisfied by Jolene issuing 48 million equity shares valued at €2.50 each and €80 million in cash.

The fair value of the net assets acquired on the acquisition date was €180 million, consisting of the following:

• Property, plant and equipment €130m


• Intangible assets €20m
• Inventory €25m
• Cash €20m
• Trade payables (€15m)
€180m

The fair value of the non-controlling interest at the acquisition date was €47 million. Jolene uses the full (fair value)
goodwill method in all acquisitions. Goodwill was tested for impairment at 31 July 2018, and any impairment loss
was correctly accounted for through operating expenses.

(ii) Depreciation of property, plant and equipment amounted to €207 million, charged to operating expenses.
Amortisation charges of €45 million relating to intangible assets were also charged to operating expenses.

(iii) Disposals of property, plant and equipment were made for proceeds of €140 million, on which gains of €14 million
were recognised. These gains were netted against operating expenses. No disposals of intangible assets were
recorded.

(iv) There were no non-cash adjustments to the 6% bonds. Interest has been paid up to date.

(v) Included in the figure for ‘trade payables and provisions’ at 31 July 2018 is a provision for warranty claims
amounting to €27 million (2017: €14 million).

(vi) Equity dividends were paid during the period by Jolene and Marlene.

(vii) Financial assets which had cost €60 million, and had a carrying value on 1 August 2017 of €75 million, were sold
during the year for €78 million. The gain was netted against finance costs.

(viii) A bonus issue was made during the year capitalising €50m of retained earnings. Other shares were issued for
cash, in addition to those to fund the acquisition referred to in note (i) above.

REQUIREMENT:
Prepare for the Jolene Group for the year ended 31 July:

(a) A Consolidated Statement of Changes in Equity in accordance with IAS 1- Presentation of Financial Statements,
and
(8 marks)

(b) A Consolidated Statement of Cash Flows in accordance with IAS 7 - Statement of Cash Flows. (22 marks)

[Total: 30 Marks]

Page 4
3. The following multiple-choice question contains eight sections, each of which is followed by a choice of
answers. Only one of the answers offered is correct. Each question carries 2.5 marks. Provide your
answer to each section on the answer sheet provided.

REQUIREMENT:
Give your answer to each section on the answer sheet provided

1. How many elements of financial statements are identified by the IASB’s Conceptual Framework?

(a) Two
(b) Three
(c) Four
(d) Five.

2. Mitten Plc is an Irish company whose functional currency is the euro. On 31 May 2018, it sold goods to a UK
customer for GBP £50,000. At the reporting date 31 July 2018, the amount remained receivable. The relevant
exchange rates were as follows:

31 May 2018: €1 = GBP £0.86


31 July 2018: €1 = GBP £0.93

Ignoring the time value of money, the amounts which would appear in the financial statements of Mitten Plc for
year ended 31 July 2018 are:

Revenue Receivables
(a) €53,763 €53,763
(b) €58,140 €53,763
(c) €53,763 €58,140
(d) €58,140 €58,140.

3. IAS 8 - Accounting Policies, Changes in Accounting Estimates and Errors draws a clear distinction between
accounting policies and accounting estimates. Which of the following would be considered a change of accounting
policy under IAS 8?

(a) Revision of the monetary amount of a provision for expected costs of a court case taken against the entity,
as a result of new information received.
(b) Revision of the useful economic life used to depreciate plant and equipment from 6 years to 3 years.
(c) Change from the cost model to the revaluation model of IAS 16 – Property, Plant and Equipment in respect
of properties.
(d) All of the above are changes of accounting policy.

4. At the reporting date, 31 July 2018, Guy Plc carried its premises at its fair value of €45 million. The approval date
for the financial statements is expected to be 12 September 2018. On 15 August 2018, it was announced that the
local authority would be opening a landfill facility adjacent to Guy’s premises. Guy’s professional valuers have
estimated that the fair value of the premises is now €36 million. Profit for the year was €12 million.

Which of the following is the correct accounting action for the financial statements for year ended 31 July 2018?

(a) Continue to carry the premises at €45 million and record the loss in the following year’s financial
statements.
(b) Continue to carry the premises at €45 million but provide a disclosure note in the July 2018 financial
statements explaining the new value and the event causing the reduction.
(c) Revise the valuation to €36 million in the July 2018 financial statements.
(d) Sue the local authority for the loss in value.

Page 5
5. Troy Plc has calculated its closing inventory for year ended 31 July 2018 at €56,900. Included in this figure is a
batch of 30 items of raw material carried at the cost price €1,000 each. These items have declined in value, and
could be sold for a maximum of €23,500 at 31 July 2018. However, Troy Plc plans to incorporate these items into
finished goods and it expects these to generate a profit of €6,800. What is the correct figure for closing inventory
at 31 July 2018 according to IAS 2 - Inventory?

(a) €26,900
(b) €50,400
(c) €56,900
(d) €63,700.

6. Norbert Plc controls land carried at €12 million at 31 July 2018, its reporting date. It has received a valuation from
professional valuers showing a fair value of €14 million. It wishes to incorporate the revised values into the
financial statements. This land had previously been revalued for the first time in 2016, and the loss on that
revaluation of €1.3 million had been charged to profit or loss. What is the correct accounting treatment of the
revaluation on 31 July 2018 (in addition to debiting land)?

(a) Credit other comprehensive income with €2 million.


(b) Credit profit or loss with €2 million.
(c) Credit profit or loss with €1.3 million, and other comprehensive income with €0.7 million.
(d) Credit retained earnings with €1.3 million as a prior-period adjustment, and credit other comprehensive
income with €0.7 million.

7. Is it permissible to revalue intangible assets under IAS 38 - Intangible Assets?

(a) Yes, provided the directors can make a reasonable estimate of the revalued amount.
(b) Yes, provided the directors can make a reasonable estimate and the entity chooses the revaluation model.
(c) Yes, provided the directors can make a reasonable estimate, the entity chooses the revaluation model and
there is an active market in identical assets.
(d) No, revaluation is prohibited by IAS 38.

8. Which of the following is required to comply with IAS 34 - Interim Financial Reporting?

(a) Companies must prepare financial statements at least quarterly.


(b) Companies must prepare financial statements at least semi-annually.
(c) Companies choosing to prepare interim financial reports must comply with IFRS when doing so.
(d) None of the above.

[Total: 20 marks]

Page 6
Answer either Question 4 or Question 5
4. IFRS 16 - Leases was issued in January 2016 and is effective for accounting periods beginning on or after 1
January 2019. However, early adoption is permitted, provided IFRS 15 - Revenue from Contracts with Customers
is implemented also. The IFRS brings significant changes to those leases formerly classified as operating leases
under IAS 17 - Leases, the previous standard.

(i) On 1 August 2017, Manfred Plc entered into an agreement to lease a building for a 10-year period. The
lease terms stipulated that the annual lease rental would be €100,000 per annum in arrears, with the first
payment due on 31 July 2018. The interest rate implicit in the lease is 7%, and the present value of the
minimum lease payments is €702,358. Manfred incurred costs of €30,000 in entering the lease. The lease
terms allow for the extension of the lease at market rental. However, it is not certain that Manfred will take
up this option.

(ii) On the same date, Manfred Plc entered into an agreement to acquire a motor vehicle. The terms of the
agreement were that the vehicle would be leased for 5 years from the date of inception, subject to a deposit
of €19,972 and 5 annual payments of €6,500 in advance, commencing on 1 August 2017. The fair value
of the vehicle and the present value of the lease payments were €48,000 at inception. The interest rate
implicit in the lease is 8%.

REQUIREMENT:

(a) Outline the key principles behind the accounting treatment for leases as required by IFRS 16. (6 marks)

(b) Show, with appropriate calculations, the accounting entries required to record each transaction above for the year
ended 31 July 2018. Present the relevant extracts from the statement of profit or loss for the year ended 31 July
2018, and the statement of financial position as at that date.
(14 marks)

[Total: 20 Marks]
OR
5. IFRS 11 - Joint Arrangements was issued in May 2011. It establishes the principles for accounting for business
arrangements that are controlled jointly by two or more parties. The standard classifies joint arrangements into
two types: Joint Operations and Joint Ventures.

(i) On 1 August 2017, Lacey Plc, a company that owns a shipyard, is asked to construct a passenger liner for
a customer. The customer requires special capabilities that require a specially designed propulsion system.
The shipyard enters into a contract with an engine manufacturer whereby the total price of the ship will be
€100 million to be split 80% to the shipyard and 20% to the engine manufacturer. Under the agreement,
Lacey Plc will complete the structure of the ship, and the engine manufacturer will design and supply the
engine. During the year ended 31 July 2018 the ship was completed on schedule and the agreed
consideration was paid. Costs incurred by Lacey Plc were €62 million.
(ii) On 1 August 2017, Lacey Plc entered into an arrangement with another company to develop a more
modern shipyard. The two companies set up a new entity to build the shipyard, and invested €130 million
each into the new entity. They agreed to manage the resulting asset jointly. During year ended 31 July 2018
the shipyard was completed and generated a profit for the year of €4 million.

(iii) Lacey Plc has a 50% equity interest in another entity, Haddock Ltd. Haddock Ltd runs a shipping line, and
had assets of €50 million and liabilities of €48 million at 1 August 2017. The trading loss for the year ended
31 July 2018 was €4.8 million. The other 50% equity interest is held by another entity, but day-to-day
management decisions are made by Lacey Plc. Lacey Plc has appointed 4 directors to the 5-person board
of Haddock Ltd.

REQUIREMENT:

(a) Distinguish between the two types of joint arrangement described by IFRS 11 - Joint Arrangements. (8 marks)

(b) In the case of (i), (ii) and (iii) above, discuss the accounting treatment required by IFRS. Give reasons for your
answer and show any necessary journal entries in the books of Lacey Plc.
(12 marks)

[Total: 20 Marks]

END OF PAPER
Page 7
SUGGESTED SOLUTIONS

CORPORATE REPORTING
THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND

PROFESSIONAL 1 EXAMINATION – AUGUST 2018

SOLUTION 1

Marking Scheme:

(a) Explanation of intra-group dividends SPLOCI 2


Explanation of intra-group dividends SOFP 2
Additional relevant point 1
Subtotal 5

(b) Basic consolidation (100% Patrick + 100% Sally + 100% Frank) 3


Calculation and treatment of goodwill (including NCI at acquisition date) 5
Subsequent treatment of contingent consideration 2
Fair value adjustments and post acq movements 2
Intra group sales of inventory 2
Dividends 2
Reserves calculation and consolidation - both 5
NCI calculation at reporting date 2
Presentation 2
Subtotal 25

Total 30

SUGGESTED SOLUTION

(a) Intra-group dividends are not considered to be group income in the SPLOCI. If the parent has recognised its share
of dividends received or receivable from group companies, this must be eliminated on consolidation. If the parent
has not recognised the dividends receivable, no further action is necessary. Any dividends paid or payable to the
NCI shareholders must be shown in the Statement of Changes in Equity, as a deduction from NCI.

In the SOFP, the opposite is the case. Here, if the parent has recognised its share of dividends received from
subsidiaries, no further action is necessary. If the dividends are receivable, there is a cancellation between the
intra-group asset (representing dividends receivable by the parent) and the liability (representing dividends
payable by the subsidiary). If the parent has not recognised its share, the retained earnings of the parent must be
credited with its share of intra-group dividends.

The reason for the difference is that the retained earnings figures shown in the SOFP will be post SOCIE, and
will therefore be net of any dividends declared. Hence the amount of intragroup dividends will be missing from the
figures shown, if not yet recorded by the parent. In the SPLOCI, the profit for the year is before any dividends have
been deducted. Hence if the parent shows its share of intra-group dividends, these are double counted.

Page 8
(b) Group structure:

Patrick has a 60% (controlling) equity stake in Sally, bought 2 years prior to the reporting date
Patrick has an 80% (controlling) equity stake in Frank, bought 1 year ago.

Patrick Plc: Consolidated statement of financial position of as at 31 July 2018

€ million
Non-current assets:
Property, plant and equipment (4,860 + 2,100 + 1,530 8,490.0
Intangible assets - Brand (50 - 2.5) 47.5
Goodwill W1 1,516.0
Investments (4,450 - 2250 - 1920 + 750 + 250 1,280.0
11,333.5
Current assets:
Inventories (1,350 + 460 + 375 -3 (W7) 2,182.0
Trade receivables (1,720 + 520 + 125 2,365.0
Cash & bank (460 + 130 + 80 670.0
5,217.0
Total assets 16,550.5

Equity:
Equity shares 5,000.0
Revaluation surplus W2 3,520.0
Retained earnings W3 1,755.6
10,275.6
Non-controlling interest W4 2,358.9
12,634.5

Current liabilities:
Trade payables (1,430 + 100 + 70 1,600.0
Contingent consideration W6 520.0
Dividends proposed (680 + 40 - 24) (W8) 696.0
Current taxation (940 + 120 + 40 1,100.0
3,916.0
Total equity & liabilities 16,550.5

W1 - Goodwill on acquisition Sally Frank


€ million € million
Cost of investment:
Cash (900 * €2.50), (640 * €3) 2,250.0 1,920.0
Contingent (at fair value at acquisition date) 400.0
2,320.0
Value of NCI at acquisition (iii) (600 * €2.50), (20% * 2130) 1,500.0 426.0
Fair value of net assets at acquisition
Equity share capital (1,500.0) (800.0)
Revaluation surplus 0.0 (450.0)
Retained earnings (600.0) (830.0)
Fair value adjustment (iii) (400.0) (50.0)
Goodwill 1,250.0 616.0

impairment loss (iv) (200.0) (150.0)


Balance to consolidated SOFP 1,050.0 466.0

Note: Contingent consideration is measured at fair value at the acquisition date, and included in the goodwill
working at this amount.

Page 9
W2 Revaluation surplus Patrick Sally Frank
€ million € million € million
Balance at reporting date 3,000.0 1,200.0 500.0
less balance at acquisition (incl fair value adjustment to PPE) 0.0 (400.0) (450.0)
For consolidation 3,000.0 800.0 50.0
Sally: 60% * 800 480
Frank: 80% * 50 40
to SOFP 3,520.0

W3 Retained earnings Patrick Sally Frank


€ million € million € million
Balance at reporting date 1,790.0 1,000.0 950.0
less balance at acquisition (600.0) (830.0)
goodwill impairment (iv) (see tutorial note below) (150.0) (200.0)
Amortisation of brand (W5) (2.5)
Movement in fair value of contingent consideration (120.0)
Unrealised profit on intra-group trading (3.0)
Dividend receivable from Sally (W8) 24.0 0.0 0.0
Subtotals 1,544.0 200.0 114.5
Sally: 60% * 200 120.0
Frank: 80% * 114.5 91.6
to SOFP 1,755.6

Note: Goodwill impairment is charged to the subsidiary when the fair value method is used (so NCI suffer their
share). It is taken to the parent when the partial method is used.

W4 - Non-controlling Interest Sally Frank


€ million € million
Balance at acquisition (W1) 1,500.0 426.0
Revaluation surplus (40% * 800), (20% * 50) 320.0 10.0
Retained earnings (40% * 200), (20% * 114.5) 80.0 22.9
Balance to SOFP 1,900.0 458.9

W5 - Fair value adjustment € million


Balance at acquisition - brand to goodwill working 50.0
Amortisation since acquisition 50/20 yrs (2.5)
Balance at reporting date to SOFP 47.5

W6 - Contingent consideration € million


Agreed amount of contingent consideration 640.0
Fair value at acquisition date per note (ii) 400.0
Fair value at reporting date per note (ii) 520.0
Additional expense to R/E of parent (120.0)

W7 - Intra-group trading € million


Total profit on trade (20-15) 5.0
Proportion relating to goods still in group inventory at Reporting Date 60%
Unrealised profit Deduct from R/E of seller 3.0
Deduct from group inventory

W8 - Dividends proposed € million


Patrick's liability 680.0
Sally's liability 40.0
Intragroup dividends (60% * 40) (24.0)
Balance to SOFP liability 696.0

Page 10
SOLUTION 2

Marking scheme:
(a) Statement of Changes in Equity 8

(b) Statement of cash flows (each number correctly calculated and placed = 1 mark) 22

Total 30

SUGGESTED SOLUTION

(a) Jolene plc: Consolidated Statement of Changes in Equity for year ended 31 July 2018

Equity Share Retained Subtotal NCI Total


Shares Premium Earnings
€m €m €m €m €m €m
Balance 1 August 2017 1,200 350 1,305.0 2,855.0 0.0 2,855.0
Acquisition 48 72 120.0 47.0 167.0
Profit for year 876.0 876.0 15.0 891.0
Bonus issue of shares 50 -50.0 0.0 0.0
Shares issued for cash 102 78 180.0 180.0
Equity dividend -335.0 -335.0 -12.0 -347.0
Balance 31 July 2018 1,400 500 1,796.0 3,696.0 50.0 3,746.0

(b) Jolene plc: Statement of Cash Flows for year ended 31 July 2018
€ million € million
Operating Activities
Profit before taxation 971
Gains on revaluation of financial assets (26)
Finance costs (incl gain on disposal of Financial Assets) 49
Gains on disposal of PPE (iii) (14)
Goodwill impairment charge (W3) 7
Depreciation of PPE (W1) 207
Amortisation of intangibles (ii) 45
Movement in inventory (400 – (275 + 25)) (100)
Movement in trade receivables (460 – 340) (120)
Movement in trade payables [(466-27) – (280-14+15)] 158
Movement in provision for warranty claims (27-14) 13
219
Finance costs paid (49 + 3) (52)
Taxation paid (W7) (90) 77
Net cash flow from operating activities 1,048

Investing Activities
Cash paid to acquire subsidiary (W8) (80-20) (60)
Proceeds of sale of PPE (iii) 140
Cash paid to acquire PPE (W1) (1,483)
Cash paid to acquire intangible assets (W2) (5)
Proceeds of sale of investments (vii) 78
Cash paid to acquire financial assets (W4) (79)
Net cash flow from investing activities (1,409)

Financing Activities
Issue of 6% bonds (680-550) 130
Proceeds of share issue (a) 180
Equity dividends paid (a) (335)
Dividend paid to non-controlling shareholders (a) (12)

Page 11
Net cash flow from financing activities (37)
Net cash flow for the year (398)
Opening cash & cash equivalents 230
Closing cash & cash equivalents (168)

W1
PPE
€ million € million
Bal b/d 2,400 Depreciation (note ii) 207
Acquired on acq. of Marlene plc (W8) 130 Disposal (140 – 14) (iii) 126
Acquired for cash (balancing figure) 1,483 Bal c/d 3,680
4,013 4,013

W2
Intangible Assets
€ million € million
Bal b/d 350 Amortisation charge (ii) 45
Acquired on acq. of Marlene plc (W8) 20 Bal c/d 330
Acquired for cash (bal fig) 5
375 375

W3
Goodwill
€ million € million
Bal b/d -- Impairment charge (bal fig) 7
Recognised on acq. of Marlene plc (W8) 67 Bal c/d 60
67 67

W4
Financial Assets
€ million € million
Bal b/d 180 Disposal 75
Profit or loss 26 Bal c/d 210
Acquired for cash (bal fig) 79
285 285

W6
6% Bond
€ million € million
Bal b/d 550
Bal c/d 680 Cash (bal fig) 130
680 680

W7
Taxation
€ million € million
Cash paid (balancing figure) 90 Bal b/d 90
Bal c/d 80 SPLOCI 80
170 170

Page 12
W8 – Acquisition € million
Cost of investment (80%)
Shares issued (48 share capital, 72 share premium) 120
Cash 80
200
FV of NCI 47
FV of net assets at acquisition:
PPE 130
Intangible assets 20
Inventory 25
Cash 20
Trade payables (15)
(180)
Goodwill 67

Net cash flow impact on purchase is an outflow of €60m (cash paid 80m less cash acquired 20m).
All other implications should be recorded in the respective accounts.

Page 13
SOLUTION 3
Each correct mark gains 2.5 marks. No partial marks are awarded. Workings are not marked.

1 Answer (d)
They are: Asset, Liability, Equity, Income & Expense.

2. Answer (b)
Revenue is recorded at the rate prevailing on the transaction date (£50,000 / 0.86 = €58,140).
Receivables are recorded at the rate prevailing at the reporting date (£50,000 / 0.93 = €53,763).

3. Answer (c)
Answers (a) and (b) are changes in accounting estimates.

4. Answer (b)
As the event causing the loss did not occur until after the reporting date, this is a non-adjusting event. As the
amount (€9 million) is likely to be material, the matter should be disclosed in the notes.

5. Answer (c)
If the inventory has an expected use that will lead to a recovery in excess of its cost, the amount recoverable is
deemed to be its net realisable value. Hence, no write down is required.

6. Answer (c)
Under the revaluation model of IAS 16, and reversal of a previous revaluation should reverse the accounting
treatment of that prior revaluation. Hence, €1.3 million should be credited to profit or loss, as this amount was
written off profit or loss previously. The excess is treated as a first-time revaluation and credited to OCI.

7. Answer (c)
IAS 38 requires that an active market exist in identical assets before an intangible may be considered for
revaluation. The entity may choose the cost model or the revaluation model. It is implicit in all revaluations that a
reasonable estimate can be made of the fair value of the asset.

8. Answer (c)
IAS 34 does not require the preparation of interim reports. However, if they are prepared they must conform to
IFRS.

Page 14
SOLUTION 4
Marking Scheme:

(a) 3 well explained points at 2 marks each


Subtotal 6

(b)
(i) Recognition of asset and liability including set up costs 2
Calculation of finance costs 2
Calculation of depreciation 1
Calculation of closing liability and split into current and non-current 2

(ii) Recognition of asset and liability including deposit 2


Calculation of finance costs 2
Calculation of depreciation 1
Calculation of closing liability and split into current and non-current 2
Subtotal 14

Total 20

SUGGESTED SOLUTION:

(a) The approach to leases adopted by IFRS 16 requires the commitment to make annual payments to be recognised
as a liability, provided the resulting benefit is an asset under the control of the entity for the term of the lease.

The asset is recognised at present value of the minimum required lease payments, and is depreciated over the
shorter of the lease term or the asset’s useful economic life (unless it is highly likely that the asset will transfer to
the lessee at the end of the least term, in which case the asset’s useful economic life should be used).

The liability is initially measured at the present value of minimum required lease payments, and is subsequently
measured at amortised cost, with finance costs taken to profit or loss as incurred, using the effective rate implicit
in the lease, or the entity’s cost of capital if the implicit rate is not available.
(6 marks)
(b)
(i) Initial recognition & measurement:
The lease obligation is initially recognised at €702,358.
The asset is recognised at this amount plus costs (€702,358 + 30,000), or €732,358.

Journal:
Dr Leasehold buildings €732,358
Cr Lease obligation €702,358
Cr Cash (costs) €30,000

Subsequent measurement:
Finance cost for year ended 31 July 2018 (702,358 * 7%) €49,165
Payment made 31 July 2018 €100,000
Depreciation of leased asset (732,358 / 10 years) €73,236

Journal:
Dr Profit or loss (finance costs) €49,165
Cr Lease obligation €49,165

Dr Lease obligation €100,000


Cr Cash €100,000

Dr Profit or loss (depreciation) €73,236


Cr Leasehold asset accumulated depreciation) €73,236

Closing balance on lease obligation (702,358 + 49,165 – 100,000) €651,523


Presented as current liability (100,000 – (651,523 * 7%)) €54,393
Presented as non-current liability €597,130

Page 15
Extracts from financial statements for year ended 31 July 2018:

Statement of Profit or Loss for year ended 31 July 2018: €


Operating costs (depreciation) 73,236
Finance costs 49,165

Statement of Financial Position as at 31 July 2018: €


Non-current assets:
Leasehold building (732,358 – 73,236) 659,122

Non-current liabilities:
Lease obligation 597,130

Current liabilities:
Lease obligation 54,393

(ii) Initial recognition & measurement:


The asset is recognised at: €48,000
The lease obligation is initially recognised at €48,000 – 19,972 – 6,500) €21,528

Journal:
Dr Vehicles €48,000
Cr Lease obligation €21,528
Cr Cash (upfront payments: 19,972 + 6,500) €26,472

Subsequent measurement:
Finance cost for year ended 31 July 2018 (21,528 * 8%) €1,722
Depreciation of leased asset (48,000 / 5 years) €9,600

Journal:
Dr Profit or loss (finance costs) €1,722
Cr Lease obligation €1,722

Dr Profit or loss (depreciation) €9,600


Cr Leasehold asset accumulated depreciation) €9,600

Closing balance on lease obligation (21,528 + 1,722) €23,250


Presented as current liability (full payment as it is in advance, due 1 August 2018) €6,500
Presented as non-current liability €16,750

Extracts from financial statements for year ended 31 July 2018:

Statement of Profit or Loss for year ended 31 July 2018: €


Operating costs (depreciation) 9,600
Finance costs 1,722

Statement of Financial Position as at 31 July 2018: €


Non-current assets:
Leasehold building (48,000 – 9,600) 38,400

Non-current liabilities:
Lease obligation 16,750

Current liabilities:
Lease obligation 6,500

(14 marks)

Note: Combined extracts showing parts (i) and (ii) together would be acceptable for full marks.

[Total: 20 MARKS]

Page 16
SOLUTION 5

Marking Scheme:
(a) Clear distinction required for full marks
Subtotal 8

(b)
(i) Recognition that this is a joint operation, with reasons 2
Accurate calculations and journal entry 2

(ii) Recognition that this is a joint venture, with reasons 2


Accurate calculations and journal entry 2

(iii) Recognition that this is a subsidiary, with reasons 2


Accurate calculations and journal entry 2
Subtotal 12

Total 20

SUGGESTED SOLUTION:

(a) A Joint Arrangement is an arrangement in which two or more parties have joint control over another entity.

Joint Control is the contractually agreed sharing of control. This exists only when decisions are made with the
unanimous consent of the parties sharing control.

There are two types of joint arrangement:


Joint operation; and
Joint venture.

Joint operation
This is an arrangement through which the parties to the arrangement have rights to certain assets and obligations
for certain liabilities of the arrangement. Joint operations may or may not separate legal entities. Each venture will
record its share of the operation’s assets, liabilities, expenses and gains as determined by the substance of the
contract setting up the joint operation. There are no adjustments needed on consolidation.

Joint venture
This is an arrangement through which the parties have joint control over the NET ASSETS of the venture (as
distinct from the individual assets and liabilities). It will be a separate legal entity. In this situation, the investment
is accounted for either at cost, or in accordance with IFRS 9 in the individual financial statements of each venturer.
On consolidation, equity accounting is used exactly as for associates.
(8 marks)

(b)
(i) This transaction involves the agreement between Lacey and a partner to develop a single project. No new entity
is formed. Both parties would seem to be responsible for their own costs, and revenue division is pre-agreed.
There is no provision for an ongoing relationship between the parties.

This is clearly a joint operation. Each party is responsible for their own assets, liabilities, expenses and gains, and
will account for these.

Lacey will recognise €80 million in revenue once the ship is complete and control is handed over to the customer.
Lacey will also recognise €62 million in cost of sales. It will not recognise the costs or revenue attributable to the
engine manufacturer.

Journal: € million € million


Dr Cash 80
Cr Revenue 80
(recognition of revenue and cash received)

Dr Cost of sales 62
Cr Cash / payables 62
(recognition of costs incurred, possibly paid)
(4 marks)
Page 17
(ii) This transaction appears to be an agreement between two parties to construct a new asset and manage it jointly.
A new entity is formed, and each party contributed 50% of the capital invested. it appears that the entity is under
joint control, with neither party having full control over any individual assets or liabilities of the new entity. Hence
the arrangement is a joint venture.

Under IFRS 11, joint ventures are accounted for using equity accounting, similarly to associate companies. Hence
the new entity will initially be varied in the books of Lacey at €130 million (cost of investment). The carrying value
will be adjusted by Lacey’s share of any profits or losses recognised by the joint venture. In the current year, this
will amount to €2 million (50% of €4 million).

Journal: € million € million


Dr Investment in joint venture 130
Cr Cash 130
(recognition of investment made in joint venture)

Dr Investment in joint venture 2


Cr Profit or loss 2
(recognition of share of profit earned by the joint venture in the year)
(4 marks)

(iii) Under IFRS 10, control is the ability to direct the operations of another entity and benefit from it.

Haddock Ltd would appear to be under the control of Lacey.

Despite having a 50% interest, less than that which would automatically indicate control, the fact that Lacey
makes all operational decisions and has a majority of the Board would suggest that control exists.

Hence, Haddock should be consolidated with Lacey and a 50% Non-controlling interest recognised.

Journal: € million € million


Dr Assets 50
Cr Liabilities 48
Cr Non-controlling interest 1
Cr Group reserves 1
(recognition of net assets of Haddock at 1 August 2017 in group accounts of Lacey)

Dr Group reserves / profit or loss 2.4


Dr Non-controlling interest 2.4
Cr Net assets 4.8
(recognition of loss for year ended 31 July 2018 in the group accounts of Lacey)

(4 marks)

[Total: 20 MARKS]

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