UPDATE SHEET

P2 (UK/INT) Corporate Reporting, Complete text, 2011.

ISBN: 978-0-85732-143-5

Chapter 1 Expandable text solution Pauline (W3) Goodwill - page 28

Error:

- Cash paid (2,400 x $1.25) 7,500

Correction:

- Cash paid (6,000 x $1.25) 7,500

Chapter 2 - Illustration 4 Exotic - page 85

Retained earnings brought forward for Kiwi should be stated at $10,459

Chapter 2 Expandable text solution (W4) - page 90

The figure of (308) is incorrect– it should be stated as (380).

Chapter 2 Expandable text solution (W7) - page 90

Error:

Share of Melon

90% (24,068 x 1,425)(W2) = 20,378

Share of Kiwi

72% (19,883 x 950)(W2) = 13,632

Correction:

Share of Melon

90% (24,068 – 1,425)(W2) = 20,378

Share of Kiwi

72% (19,883 – 950))(W2) = 13,632

Chapter 2 Expandable text solution (W9) - page 90

Error:

Share of Melon

90% (13,315 x 1,425) (W2) = 10,701

Share of Kiwi

72% (10,459 x 950) (W2) = 6,846

Correction:

Share of Melon

90% (13,315 – 1,425) (W2) = 10,701

Share of Kiwi

72% (10,459 – 950) (W2) = 6,846

Answer to UK GAAP Question 2 Kathmandu Group - Working 3 on page 140

Error:
Less: Net assets disposed of: (W1) £138,000

Correction:
Less: Net assets disposed of: 70% X £138,000 = £96,600

Answer to Q5 Bravado: Page 130 and 136

The totals for Retained earnings and Other components of equity are misstated on the Statement of
Financial Position – they should be stated as follows:

$
Other components of equity (deficit) (6.40) Not $9.5m as printed
Retained earnings 272.22 Not $256.32 as printed

The analysis of these amounts within working 5 on Page 136 of the Exam Kit should be as follows:

Other components of equity Retained earnings

$m $m
Bravado 12.0 Bravado 240.0
Investment in associate (1.0) Inventory write-down (Issue 2) (18.0)
Financial asset impaired (issue 1) (17.4) Remeasurement of initial holding to 5.0
FV
––––– Message:80% × (414 – 400) 11.2
(6.4) Mixted: 70% × (196.6 – 173.0) 16.52
––––– Share of associate profit (W6) 2.5
Gain on reclassification of Clarity (W6) 1.0
Gain on bargain purchase (W3) 14.0
–––––
272.22
–––––
Chapter 3 Answer to Illustration 2 Rock page 117-118

The answer is correct, subject to confirmation of how the carrying value of NCI at disposal date is
determined; it is correctly stated at $950 within the answer.

Working 2 – Carrying value of NCI at disposal date should be added as follows:

$
Fair value of NCI at acquisition date 800
NCI share of post-acquisition change (2,400 – 1,900) x 30% 150
in net assets to disposal date
-----
Carrying value of NCI at disposal date 950
-----
Chapter 3 Answer to TYU 3 Padstow part (b) page 145-146

The carrying value of the NCI at disposal date is misstated. The amended answer is:

$000 $000
Sale proceeds 250.0
Carrying value of subsidiary at Net assets (given) 88.0
disposal date:
Unimpaired goodwill (W1) 23.0
–––––
111.0
Less: CV of NCI at disposal date (W2) (14.2)
––––– (96.8)
–––––
Pre-tax gain on disposal 153.2
Tax (per parent in part (a) (45.0)
–––––
Post-tax gain to group 108.2
–––––

Amended (W2) NCI at disposal date: $000

Fair value of NCI at acquisition date 15.0
NCI share of post-acquisition retained (88.0 – 69.0) x 20% 3.8
earnings
Less: NCI share of goodwill impairment 23.0 x 20% (4.6)
(W1)
–––––
Carrying value of NCI at disposal date 14.2
–––––
Chapter 3 Answer to TYU 8 – Gordon and Mandy page 159

Answer should be:

(i) Purchase of 20% of Mandy shares – logically this eliminates NCI and therefore NCI should
become zero. Calculate the change in the carrying value of NCI as a result of the share
purchase
$
Cash paid 25,000
Decrease in NCI 20/20 x 20,000 20,000
--------
Decrease in equity 5,000
--------

(ii) Purchase 5% of Mandy shares. Calculate the change in the carrying value of NCI as a result of
the share purchase
$
Cash paid 9,000
Decrease in NCI 5/20 x 20,000 5,000
--------
Decrease in equity 4,000
--------

Comments:
Where there is a either a purchase or disposal of shares in a subsidiary, and control is retained,
this results in an equity transfer, rather than a gain or loss to the group.
With an additional purchase of shares, the decrease in NCI is based upon the proportionate
change in the carrying value of the NCI.
Where there is a disposal of shares in a subsidiary, and control is retained, this also results in an
equity transfer (e.g. chapter 3 TYU 6 David & Goliath). The key point here is that the increase in
NCI is based upon the carrying value of net assets plus goodwill in the subsidiary.

Chapter 5 Answer to Illustration relating to associate - page 197

Sentence 4 within Note 2, please remove:-

“At 31 March 20X4, Large’s inventories included no goods purchased from Little “

Chapter 6 Answer to Illustration relating to associate - page 231

The dividend received from the associate is incorrectly stated as $58,000; it should be stated as
$38,000 to agree with the information in (W1).

Chapter 10 Answer to TYU 4 Cedar page 369

Please ignore 32 (24) (50) at the very bottom of the page.

Chapter 14 Answer to TYU 4 Cedar page 510

Within the narrative at the end of the answer, the charge against retained earnings should be stated
as 60% x $150m = $90m – not the stated figure of $16m.
Chapter 16 - page 571-572

Illustration – Hedge accounting

On 1 January 20X8 an entity purchased an equity instrument at a fair value of $900,000. As it was
not acquired with the intention of taking advantage of short-term changes in fair value, it would
normally be designated upon initial recognition to be classified as fair value through other
comprehensive income.

Due to the exposure to risk of changes in fair value of the equity instrument, the entity entered into
an interest rate swap, identifying the swap contract as a hedging instrument as part of a fair value
hedging arrangement. The fair value hedge has been correctly documented and designated upon
initial recognition and is expected to be an effective hedging arrangement. Consequently, changes in
fair value to both the equity instrument (hedged item) and the swap contract (hedge instrument)
will be matched in profit or loss, rather than accounted for separately.

At the reporting date 31 December 20X8, the fair value of the equity instrument has fallen to
$800,000, and there has been an increase in the fair value of the interest rate swap contract of
$90,000.

Required:
Illustrate and explain the accounting treatment for the fair value hedge arrangement based upon the
available information.

Solution:

The fall in fair value of the equity interest of $100,000 is taken to profit or loss. This is matched with
the increase in fair value of the interest rate swap contact of $90,000, resulting in a small net loss of
$10,000.

The effectiveness in the hedge arrangement (see later within section in Complete Text) can be
evaluated by comparing the change in the hedged item and the hedged instrument as follows:

Change in hedged item $100,000

Change in hedging instrument $90,000

Either: 100,000/90,000 = 111%

Or: 90,000/100,000 = 90%

As long as either one of the two measures above falls within the range 80% - 125%, the hedge is
regarded as effective.

The above fair value hedge arrangement would therefore be regarded as effective.

Chapter 16 - page 572 and 592

Replacement for TYU 8 Strauss question and solution on pages 572 and 592 respectively of the 2011
Complete Text.
Test your understanding 8 Strauss – Hedge accounting

On 1 January 20X9 Strauss purchased an equity instrument at a fair value of $5,000,000. As it was
not acquired with the intention of taking advantage of short-term changes in fair value, it would
normally be designated upon initial recognition to be classified as fair value through other
comprehensive income.

Due to the exposure to risk of changes in fair value of the equity instrument, the entity entered into
an interest rate swap, identifying the swap contract as a hedging instrument as part of a fair value
hedging arrangement. The fair value hedge has been correctly documented and designated upon
initial recognition and is expected to be an effective hedging arrangement.

At the reporting date 31 December 20X9, the fair value of the equity instrument has fallen to
$4,200,000, and there has been an increase in the fair value of the interest rate swap contract of
$750,000.

Required:
Illustrate and explain the accounting treatment for the fair value hedge arrangement based upon the
available information.

Solution:

The fall in fair value of the equity interest of $800,000 is taken to profit or loss. This is matched with
the increase in fair value of the interest rate swap contact of $750,000, resulting in a small net loss
of $50,000.

The effectiveness in the hedge arrangement can be evaluated by comparing the change in the
hedged item and the hedged instrument as follows:

Change in hedged item $800,000

Change in hedging instrument $750,000

Either: 800,000/750,000 = 107%

Or: 750,000/800,000 = 94%

As long as either one of the two measures above falls within the range 80% - 125%, the hedge is
regarded as effective.

The above fair value hedge arrangement would therefore be regarded as effective.
Chapter 20 Answer to TYU 3 Smith & Thompson page 714-715

Within (W3) the summary of capital settlement on winding up should be stated as follows – the
amended descriptions are stated in bold:

Amended (W3) capital settlement on winding up $ $

Equity shares 52,000
Debenture 30,000
Cash return to equity holders 3,000
Share capital 30,000
Share premium 10,000
Retained earnings 16,000
Profit on revaluation 29,000

––––– –––––
Carrying value of NCI at disposal date 85,000 85,000
––––– –––––