PROFESSIONAL 1 EXAMINATION - APRIL 2008

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 Questions 4 or 5 will be marked.)

CORPORATE REPORTING

NOTES

PRO-FORMA INCOME STATEMENT BY NATURE, INCOME STATEMENT BY FUNCTION AND BALANCE SHEET ARE PROVIDED

TIME ALLOWED: INSTRUCTIONS:

3.5 hours, plus 10 minutes to read the paper.

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 that candidates are expected to pay particular attention to their communication skills and care must be taken regarding the format and literacy of the solutions. The marking system will take into account the content of the candidates' 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(s) attempted.

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 2008

Time allowed 3.5 hours, plus 10 minutes to read the paper.

1.

You are required to answer Questions 1, 2 and 3. Big Motos Ltd sells high powered motorcycles, mainly for the high-end, elite sports market. A draft set of financial statements for the year ended 31 March 2008 has been prepared for you, the new Financial Accountant, by the Assistant Accountant. You have been asked by the Finance Director to report to him on the financial position as soon as possible.
Big Motos Ltd. Income statement for the year ended 31/3/2008 '000 1,960 (1,220) 740 44 (376) (164) 244 (8) 236 (36) 200

Answer Questions 1 to 3 and Question 4 or 5.

Revenue Cost of sales Gross profit Other income Distribution costs Administrative expenses Operating profit Finance costs Profit before tax Income tax expense Profit for the period

Balance Sheet as at 31/3/2008 '000 '000 Assets Non-current assets Property, plant & equipment (see note below) Investment property at valuation 1/4/2007

676 220 896

Current assets Inventories Trade and other receivables Cash and cash equivalents

80 252 174 506 1,402

Total Assets

Equity and Liabilities Equity Ordinary share capital 50c Share premium Revaluation reserve Retained earnings 1/4/2007 Profit for the year Dividends paid and accrued Retained earnings 31/3/2008

250 200 70 355 200 (60) 495 1,015

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'000 Non-current liabilities 10% Bank Term Loan 2011 Current liabilities Trade and other payables Dividends Taxation

'000 80

241 30 36 307 387 1,402

Total Liabilities Total Equity and Liabilities

Note: Property, plant & equipment '000 Land at cost Property - at valuation 1/4/2005 Accumulated depreciation 1/4/2007 Plant and equipment - at cost 31/3/08 Accumulated depreciation 1/4/2007 Vehicles - at cost 31/3/08 Accumulated depreciation 1/4/2007 Total 300 (12) 240 (72) 192 (72) '000 100 288 168 120 676

Following discussions with the Assistant Accountant and the Finance Director, the following additional information has come to light: 1. Depreciation, is usually provided on property, plant and equipment as follows: Property: 2% per annum straight line (see 2. below) Plant & Equipment: 10% per annum straight line Vehicles: straight line over eight years (see below) Big Motos Ltd has now decided that it would be more prudent to depreciate its vehicles over four years, commencing 1 April 2007. It is company policy to provide for a full year of depreciation on assets in the year of acquisition and none in year of disposal. 2. The property was previously valued on 1 April 2005 by a professional valuer. Due to the recent property slump, it was considered prudent to revalue the property. It was valued, again by a professional valuer, on 1 April 2007, at 200,000. The expected useful life of the property was estimated at 40 years from that date. The valuation as at 1 April 2007 has not been reflected in the accounts. Inventory at 31 March 2008 includes some older model bikes valued at 40,000 at that date, which were later sold on 15 April 2008 for 30,000. It cost 2,000 to advertise them. During the half year stock take, it was discovered that the closing inventory at 31 March 2007 had included a double count of two bikes worth 20,000 in total. The draft 2008 financial statements have not been adjusted. 'Other income' in the income statement relates to a Government grant covering two separate issues: Training of new staff: 14,000 Acquisition of new equipment: 30,000 Both grants were received on 1 October 2007. The equipment was purchased at that date and has been accounted for correctly. The training took place in November 2007.
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3.

4.

5.

The dividend accrued was proposed by the Directors on 20 March 2008 and will be approved at the AGM in May 2008. The investment property was purchased on 30 September 2002 for 120,000. Investment property is accounted for using the fair value method under IAS 40. The value of the property was 200,000 at 31 March 2008. Cost of sales includes a rental payment of 10,000 for a piece of equipment acquired on a finance lease. The cash cost of the equipment is 40,000 and a total of five annual rental payments in arrears are to be made on 31 March each year, commencing in 2008. Big Motos Ltd will acquire the equipment outright for 1 at the end of the lease. The rate of return inherent in the lease is 8%. Only the rental payment has been reflected in the accounts.

6.

7.

REQUIREMENTS: (a) Prepare, in a form suitable for publication, the Balance Sheet of Big Motos Ltd as at 31 March 2008. (14 marks) Format & Presentation (1 Mark) Prepare the Statement of Changes in Equity for the year ended 31 March 2008. Set out the following: (i) (ii) (d) an appropriate accounting policy for property, plant and equipment; and any other accounting policy relevant to the balance sheet of Big Motos Ltd. (4 marks) (6 marks)

(b) (c)

Write a brief memo to the Finance Director of Big Motos Ltd, explaining the required accounting treatment of items 5 and 7 above. (5 marks) NOTE: A full Income Statement is NOT required. [TOTAL: 30 MARKS]

2.

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Draft Income Statements for the year ended 31/12/2007 Paper Group Labels Ltd. '000 '000 Revenue 6,500 1,200 Cost of sales (4,200) (560) 2,300 640 Gross profit Other income 50 Distribution costs (550) (240) Administrative expenses (720) (280) Operating profit 1,080 120 (80) (36) Finance costs Profit before tax 1,000 84 Income tax expense (250) (64) Profit for the period 750 20 Attributable to: Equity Minority interest

Pens Ltd. '000 500 (250) 250 (75) (95) 80 (10) 70 (10) 60

696 54 750 Draft Statement of Changes in Equity for the year ended 31/12/2007 [Extract]

Retained Earnings '000 Balance 1 January 2007 3,100 Profit for the year 750 Dividends declared (500) Balance 31 December 2007 3,350

Retained Earnings '000 800 20 820

Retained Earnings '000 180 60 240

Additional Information: 1. Paper PLC (the parent company) acquired an 80% holding in Labels Ltd on 1 January 2004 for 2,650,000 when the fair value of the net assets of Labels Ltd was 3,100,000. The share capital (1 nominal value) of Labels Ltd was 2,600,000 at the acquisition date and has not changed since. In 2005 the goodwill in Labels Ltd. was impaired by 110,000. The draft group accounts of Paper Group do not include the results of Labels Ltd for the year ended 31 December 2007. On 1 October 2007 Paper Group sold its entire holding in Labels Ltd for 3,150,000. The disposal has not as yet been recognised in the consolidated accounts of the Paper Group. Paper PLC acquired a holding of 30% in Pens Ltd on 1 July 2006 for 205,000 when the share capital of Pens Ltd was 300,000 and the retained earnings were 150,000. During 2007 Paper PLC sold goods to Pens Ltd for 100,000 at a margin of 20%. Half of these goods remained in inventory at the balance sheet date and all trading balances were cleared. The new Group Financial Controller was unsure how to account for Pens Ltd so has not included any results for Pens Ltd in the draft group financial statements. During the period from 1 January 2007 to the date of disposal, Labels Ltd sold goods valued at 350,000 at a margin of 25% to Paper PLC. None of these goods were in the parent companys inventory at the date of disposal of Labels Ltd. However, Paper PLC was still showing a payable of 85,000 in respect of these goods at 1 October 2007. Included in administrative expenses in the draft income statement of the Paper Group are the following two provisions in relation to the parent company: a. b. A provision for trading losses in 2008 and 2009 in relation to another subsidiary, Pencils Ltd. A total of 40,000 has been provided for these losses. A redundancy provision of 80,000 in respect of Pencils Ltd was agreed by the Paper Group board of
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2.

3.

4.

5.

directors in November 2007. No notification of the planned redundancies has yet been given to the employees affected although this is expected in March 2008 when the restructuring plan is complete. 6. Assume all profits and dividends are earned evenly over the accounting period and that Retained Earnings is the only reserve in the financial statements of Labels Ltd.

REQUIREMENTS: a) Prepare the Consolidated Income Statement of the Paper Group for the year ended 31 December 2007 in a form suitable for publication and in accordance with International Financial Reporting Standards. (14 Marks) Format and Presentation (1 Mark) Prepare the Statement of Changes in Equity of the Paper Group for the year ended 31 December 2007 (Retained Earnings Extract only). (5 Marks) Distinguish between the consolidation method prescribed for subsidiaries (purchase / acquisition accounting) and that prescribed for associates (equity accounting) under the following headings: (i) (ii) (iii) (iv) Impact on the consolidated income statement; Impact on the consolidated balance sheet; Treatment of intra-group balances; and Treatment of intra-group transactions.

b)

c)

(10 Marks) [TOTAL: 30 MARKS]

3.

The following multiple choice question contains eight sections, each of which is followed by a choice of answers.

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Only one of each set of answers is strictly correct. REQUIREMENT: Give your answer to each section in the answer sheet provided. [TOTAL: 20 MARKS] 1. During the financial year to 31 December 2007, Greenco Ltd. spent 1 million on a new project to develop a sustainable replacement for plastic packaging. It is expected that it will take 2 years to ascertain whether new packaging will be environmentally friendly and, if it is, a further year to introduce it to the market. How should this expenditure be treated in the income statement for the current year? (a) (b) (c) (d) 1 million expenditure should be deferred and written off to the income statement over 3 years commencing in the current year 1 million should be written off to the income statement in the current year 1 million expenditure should be deferred until commercial production of the new packaging commences 1 million expenditure should be deferred and written off to the income statement over 2 years commencing in the current year

2.

Which of the following items would not normally appear under the heading Cash Flows from Investing Activities in a cash flow statement prepared under IAS 7 Cash Flow Statements (a) (b) (c) (d) Dividends paid Interest received Dividends received Proceeds from Disposal of Property, Plant and Equipment

3.

Olives Plc is preparing its group balance sheet as at 30 June 2008, which also includes its 60% subsidiary Cheeses Ltd. The net book values of the property plant and equipment in the balance sheets of the two individual companies at that date are: Olives Plc Cheeses Ltd 5.60 million 2.40 million

On 1 July 2007 Olives Plc sold equipment that originally cost 1.0 million, with a net book value of 0.8 million to Cheeses Ltd for 0.5 million, as it was no longer useful to Olives Plc. The Olives Group accounting policy is to depreciate all plant and equipment at 20% of the reducing balance. The net book value of the property plant and equipment in the Olives Group balance sheet as at 30 June 2008 is: (a) (b) (c) (d) 4. 8 million 7.86 million 8.24 million 8.3 million

Under new environmental legislation, Makers Ltd is required to install new low energy lighting systems in each of its five manufacturing facilities. The legislation requires this by 31 January 2008 or a fine of 15,000 may be levied upon prosecution. As at 31 March 2008, the companys financial year end, the operations manager of Makers Ltd has not installed any of the required lighting systems but has received a quote of 20,000 from a local supplier. How much should the financial controller of Makers Ltd include as a provision in the financial statements for the year ended 31 March 2008? (a) 35,000 (b) 15,000 (c) Nothing (d) 20,000 Which of the following is not necessarily a related party of the reporting entity according to IAS 24 Related Party
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5.

Disclosures: (a) (b) (c) (d) 6. the pension fund for the benefit of employees of the reporting entity; a company who purchased 60% of the reporting entitys finished products on normal commercial terms; an associate company of the reporting entity; the spouse of the managing director of the reporting entity.

The Finance Director of Avid Listeners PLC, a radio and production company, wishes to include the following in the year end 31 December 2007 balance sheet under the heading Intangible Assets:
G

A new five year radio broadcasting license for the North West region which cost 1 million on 1 January 2007. The brand name New FM which the company had created was valued at 7.5 million on 1 January 2007 by professional brand valuers. It is estimated to have a useful life of 10 years. The 2 million cost (paid in advance on 1 January) of a very successful marketing and advertising campaign which the Director credits with achieving a 5% market share at 31 December 2007. The campaign lasts for two years. The amount to be shown in the balance sheet of Avid Listeners PLC as at 31 December 2007 under the heading Intagible Assets is: 1,800,000 800,000 7,550,000 8,550,000

(a) (b) (c) (d) 7.

IAS 27 Consolidated and Separate Financial Statements requires which of the following? i. ii. iii. iv. (a) (b) (c) (d) Elimination of all intra-group balances Elimination of all intra-group income and expenses Exclusion from consolidation of an entity with business activities dissimilar to the parent company Use of uniform accounting policies to prepare consolidated financial statements (ii) and (iv) only (i), (ii) and (iv) only All of the above (iii) only

8.

The following details are taken from the draft financial statements of MME Plc for the financial year ending 30 June 2007. 30 June 2007 '000 500 20 1,200,000 30 June 2006 '000 400 30 800,000

Profit after tax Ordinary dividends paid No. of ordinary shares in issue at 30 June

On 1 July 2006 a rights issue of 1 share for every 2 shares held took place at 3 per share. The market price immediately preceding the rights issue was 4.50 per share. The earnings per share figures to be disclosed with the 30 June 2007 Income Statement of MME Plc should read: 2007 41.7c 40.0c 40.0c 41.7c 2006 50.0c 44.4c 46.3c 44.4c

(a) (b) (c) (d)

You are required to answer either Question 4 or 5.

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4.

IAS 16 Property, Plant and Equipment sets out the requirements for the recognition, measurement and disclosures in respect of tangible non-current assets: property, plant and equipment. In particular, the standard allows a choice of measurement base between historical cost and revalued amount and sets out the measurement rules in each case. (a) Set out the main measurement requirements of IAS 16 in respect of the revaluation model and the conditions for its use by an entity. (6 Marks) Detail how surpluses and deficits on revaluation should be recognised in the financial statements. (4 Marks) The following transactions and issues occurred in relation to the Property, Plant & Equipment of Red Ravens Ltd during the period 1/1/2001 to 31/12/2007: 1/1/2001 Purchased machine for 2,000,000 Depreciation charged at rate of 10% per annum with residual value of 400,000. Purchased building for 6,000,000 Depreciation charged at rate of 2.5% per annum with residual value of nil. 1/1/2004 Revalued machine to 1,700,000 Remaining useful life is now 4 years with a residual value of 500,000. Revalued building to 8,000,000 Remaining useful life is now 40 years. 1/1/2007 Revalued machine to 600,000 Remaining useful life is now 2 years with a residual value of 200,000. Sold Building for 9,000,000

(b)

(c)

31/12/2007

Assume a full years depreciation is charged in year of acquisition and none in year of disposal. The company does not make a reserve transfer in relation to depreciation on revaluation surpluses. REQUIREMENT: Show the relevant extracts from the Income Statement and Balance Sheet of Red Ravens Ltd for the financial years ending 31 December 2001, 2004 and 2007. NOTE: Reserve movements and notes to the financial statements are not required. (10 Marks) [TOTAL: 20 MARKS]

5.

IAS 21 The effects of changes in foreign exchange rates deals with the recording of transactions denominated in

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a foreign currency and also with the translation and presentation of foreign currency financial statements. (a) Explain briefly the following terms:
G G

Foreign currency translation Presentation currency

(2 Marks)

(b)

What is a functional currency? Describe the factors that would help an entity determine its functional currency in accordance with IAS 21. (6 Marks) For an individual company, outline the two main causes of a foreign exchange difference in relation to the purchase of goods from a foreign currency supplier. (2 Marks) On 15 November 2007, Northside Electronics Ltd (Northside), whose functional currency is the Euro, purchased raw materials from an Australian supplier for A$100,000. At the year-end 31 December 2007, one quarter (1/4) of these goods still remained in inventory. On 18 December, Northside paid the supplier half of the amount due to them. The remaining balance was due to be paid on 18 January 2008. The following exchange rates are available to you: 15 18 18 31 18 November 2007 December 2007 December 2007 December 2007 January 2008 1 1 1 1 1 = = = = = A$1.70 A$1.80 A$1.85 A$1.75 A$1.87 Spot rate Spot rate 1 month forward rate Spot rate Spot rate

(c)

(d)

Northside have not made any entries in their books to reflect the above. REQUIREMENT: (i) Show the relevant journal entries to record the above transactions in the books of Northside Electronics Ltd for the year to 31 December 2007. (7 Marks) Present the relevant amounts that would appear in the Income Statement and Balance Sheet of Northside Electronics Ltd at 31 December 2007 in respect of any: a. b. c. Gain / loss on foreign exchange Trade Payables Inventories (3 Marks) NOTE: round all amounts to the nearest Euro.

(ii)

[TOTAL: 20 MARKS]

END OF PAPER

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THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND

CORPORATE REPORTING
PROFESSIONAL 1 EXAMINATION APRIL 2008
Balance Sheet as at 31/3/2008 '000

SOLUTIONS 1 (a)

Marks

Assets Non-current assets Property, plant & equipment Investment property Current assets Inventories Trade and other receivables Cash at bank Total Assets Equity and Liabilities Equity Ordinary share capital 1 Share premium Revaluation reserve Retained earnings 31/3/2008 *

W1 W3

565.00 200.00 765.00 68.00 252.00 174.00 494.00 1,259.00

4.5 1

W4 DRAFT DRAFT

1.25 0.25 0.25

SOCE SOCE SOCE SOCE

250.00 200.00 0.00 391.80 841.80 80.00 25.86 24.00 129.86

0.5 0.5 0.5

Non-current liabilities 10% Debentures 2011 DRAFT Finance Lease obligation W7 Government Grant deferred income W6

0.25 Lease total = 3.0 Grant total = 1.5

Current liabilities Trade and other payables DRAFT Dividends W5 Finance Lease obligation W7 Government Grant deferred income W6 Taxation DRAFT

241.00 0.00 7.34 3.00 36.00 287.34 417.20 1,259.00

0.25

0.25

Total Liabilities Total Equity and Liabilities * Balancing figure in Balance Sheet, transferred to SOCE

Presentation (1 mark) (15 marks)

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(b)

Statement of Changes in Equity for the year ended 31 March 2008 Ord Share Share Revaluation Capital Premium Reserve '000 '000 '000 250.00 200.00 70.0 Balance 1/4/2007 Errors (W4) Restated amounts 250.00 200.00 70.00 Profit for period ** Revalution of premises (W2) (70.0) Ord dividends - paid Ord dividends - proposed (W5) Balance 31/3/2008 250.00 200.00 0.00 ** Balancing figure

Retained Earnings '000 355.00 (20.00) 335.00 86.8 (30.00) 391.80

Total Equity '000 875.00 (20.00) 855.00 86.80 (70.00) (30.00) 0.00 841.80

Marks 2 1 0.5 1 1

Presentation (0.5 marks) Total (6 marks)

Workings 1. Property, plant & equipment Cost / Valuation per DRAFT Revaluation Finance lease asset Acc Dep At 1/4/2007 Revaluation Charge (Premises-40 years) for (P& E 10 years) year (NBV / 4 years) 0.00 Land 100.0 Premises 300.0 (100.0) 200.0 12.00 (12.00) 5.00 P&E 240.0 40.0 280.0 72.00 Vehicles 192.0 Total 832.0 (100.0) 40.0 772.0 156.00 (12.00)

100.0

192.0 72.00

28.00 5.00 100.00 30.00 102.00 63.00 207.00

NBV 1/4/2007 NBV 31/3/2008

100.00 100.00

288.00 195.00

168.00 180.00

120.00 90.00

676.00 565.00

2.

Revaluation reserve Balance per DRAFT Revaluation of premises - 1/4/2007 Balance at 31/3/2008 Revaluation of premises - 1/4/2007

Loss

'000 70.0 (70.0) 0.0

Cost 100.0 Depreciation (12.0) Revaluation Loss 88.0 Revaluation Reserve (70.0) Charge to income statement 18.0

3.

Investment property Valuation 31/3/2008 Valuation per DRAFT Fair value loss to income statement

'000 200.0 220.0 (20.0)

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4.

Inventories Per DRAFT Inventory Write off [40 - (30 -2)] Inventory 31/3/2008 Error in stock count 2007- prior year error adjusted. Dr Retained Earnings - 1/4/2007 20,000.0 Cr Cost of sales 2008

'000 80.0 (12.0) 68.0

20,000.0

5.

Proposed dividend Dividend accrued per DRAFT IAS 10 - reversal required

'000 30.0 (30.0) 0.0 '000 60.0 (30.0) 30.0

Reversed in SOCE also Dividend DRAFT IAS 10 - reversal required Dividend paid - SOCE 6. Grant deferred income Training grant Capital grant Dr Other income Cr Deferred grant income Amortise grant over life of asset - 10 years Dr Deferred grant income BS Cr Other income IS

Treatment ok Not a revenue grant 30,000 30,000

3,000

3,000 '000 44.0 14.0 3.0 17.0 (27.0)

Other income per DRAFT Training grant Grant income - amortisation Adjustment to other income - in income statement Deferred Income on Balance Sheet Non-Current Liability Current Liability

24.0 3.0 27.0

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7.

Finance Lease Create asset and lease obligation Dr P & Equipment Cr Lease obligation Depreciation of asset [10 years]

40,000

40,000

4,000

Note: Depreciation is normally over shorter of lease term and useful life, but as in this case it is almost certain the asset will be acquired at the end of the lease term, then the useful life is chosen. Opening Balance 40,000 33,200 Rental payment 10,000 10,000 Capital Payment 6,800 7,344 3,200 6,800 Finance Cost 8% 3,200 2,656 Capital Bal o/s 33,200 25,856

Period 2008 2009

Dr Lease interest 8% Dr Capital Lease repayment Cr Rental payment - remove from Cost of sales Finance Lease obligation Opening balance Capital repayment Total Balance 31/3/2008 Split between: Current liability Non-current liability

10,000

40,000 (6,800) 33,200

7,344 25,856 33,200

8.

Proof of Profit / (loss) for the year - For illustration purposes only '000 Profit after tax per draft 200.0 Depreciation charge (63.0) Revaluation loss (18.0) Investment property Fair Value loss (20.0) Inventory write-off (12.0) Opening inventory error 20.0 Other income (27.0) Finance lease interest (3.2) Lease rental payment 10.0 86.8 Per SOCE 86.8

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(c)

Accounting policies: (i)

(2 x 2 Marks = 4 Marks)

Property Plant and Equipment With the exception of the revaluation of buildings noted below, items of property, plant and equipment are stated at historical cost less accumulated depreciation and any accumulated impairments. Land is held at historical cost and is not depreciated. Buildings are stated at valuation less accumulated depreciation and impairment charges. The most recent valuation was held on 1 April 2007 and was performed by a professionally qualified valuer. Property, plant and equipment is depreciated so as to write off the book value of each item (except land) over its useful economic life on a straight line basis at the following rates: Buildings Plant & Equipment Vehicles 40 years 10 years 4 years

(ii)

Trade and other receivables and payables Trade and other receivables and payables are stated at cost, which approximates fair value given the shortdated nature of these assets and liabilities. Trade receivables are carried at cost at original invoice amount less an allowance for potentially uncollectible debts. Inventories Inventories are stated at the lower of cost and net realisable value. Cost includes all expenditure incurred in acquiring the inventories and bringing them to their present location and condition and is based on the first in first out principle. Investment Property Investment Property, which is property held to earn rentals and/or for capital appreciation, is stated at its fair value at the balance sheet date. Gains or losses arising from changes in the fair value of investment property are included in profit or loss for the period in which they arise. Leases Assets held under finance leases, which are leases where substantially all the risks and rewards of ownership of the asset have transferred to the purchaser, are capitalised in the balance sheet and are depreciated over their useful lives with any impairment being recognised in accumulated depreciation. The asset is recorded at an amount equal to the lower of its fair value and the present value of the minimum lease payments at the inception of the finance lease. The capital elements of future obligations under leases are included in liabilities in the company Balance Sheet and analysed between current and non-current amounts. The interest elements of the rental obligations are charged to the Income Statement over the periods of the relevant agreements and represent a constant proportion of the balance of capital repayments outstanding in line with the effective interest methodology. Cash and cash equivalents Cash and cash equivalents comprise cash balances held for the purposes of meeting short-term cash commitments and investments which are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value. Where investments are categorised as cash equivalents, the related balances have a maturity of three months or less from the date of acquisition. Where bank overdrafts are repayable on demand and form an integral part of cash management, they are netted against cash and cash equivalents. Capital grants Capital grants are recognised at their fair value where there is reasonable assurance that the grant will be received and all attaching conditions have been complied with. When the grant relates to an expense item, it is recognised as income over the periods necessary to match the grant on a systematic basis to the costs that it is intended to compensate. Where the grant relates to an asset, the fair value is treated as a deferred credit and is released to the Group Income Statement over the expected useful life of the relevant asset through equal annual instalments.
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(d)

To: Finance Director Big Motos Ltd From: Financial Accountant Finance Department Big Motos Ltd. Date: xx April 2008 Subject: Treatment of proposed dividends and assets held under finance leases Issue 5 (2 Marks)

According to IAS 10 Events after the balance sheet date dividends must be either paid or declared in the financial year order to be included in the financial statements. Declared means in practice they have been approved by the shareholders at AGM. This would also be a requirement of IAS 37 Provisions, contingent liabilities and contingent assets in order that an obligation exists so that a dividend accrual can be shown as on the balance sheet. Issue 7 (3 Marks)

Assets held under finance leases, which are leases where substantially all the risks and rewards of ownership of the asset have transferred to the purchaser are capitalised in the balance sheet. Finance leased assets are depreciated over their useful lives (or lease term if shorter). The asset is recorded at an amount equal to the lower of its fair value and the present value of the minimum lease payments at the inception of the finance lease. The capital elements of future lease obligations (i.e. a loan) are included in liabilities in the balance sheet and analysed between current and non-current amounts. The interest elements of the rental obligations are charged to the income statement over the periods of the lease agreements and represent a constant proportion of the balance of capital repayments outstanding at the beginning of each period. I will be pleased to provide any additional explanation or respond to any queries that you may have with respect to the above N. Other Financial Accountant.

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Solution 2 (a) Consolidated Income Statement of the Paper Group for the year ended 31 December 2007 Paper Labels Group Ltd. Consol '000 '000 Adj '000 3/4 year Revenue W1 6,500.0 900.0 (350.0) 7,050.0 Cost of sales W1 (4,200.0) (420.0) 350.0 (4,270.0) Gross profit 2,300.0 480.0 2,780.0 Other Income 50.0 50.0 (550.0) (180.0) (730.0) Distribution costs Administrative expenses W2 (720.0) (210.0) 120.0 (810.0) Operating profit 1,080.0 90.0 1,290.0 Profit on Disposal W3 358.0 358.0 Share of Profit of Associate W4 15.0 15.0 Finance costs (80.0) (27.0) (107.0) Profit before tax 1000.0 63.0 1,556.0 Income tax expense (250.0) (48.0) (298.0) Profit for the period 750.0 15.0 1,258.0 Marks 6 x 1/4 = 1.5 Attributable to: Equity Minority interest 6 x 1/2 = 3 1,201.0 57.0 1,258.0

Adj. Marks 0.5 0.5

2 3 2

4.5

W5

1.5

Presentation (1 mark) IS Total (15 marks) (b) Statement of Changes in Equity of the Paper Group for the year ended 31 December 2007 Retained Earnings '000 Balance 1 January 2007 W6 3,239 Profit for the year 1,201 Dividends declared (500) Balance 31 December 2007 3,940 SOCE Total Marks Workings for Parts (a and b). W1 Revenue and Cost of sales Dr Revenue Cr Cost of Sales W2 Administrative Expenses a. Trading losses - reverse per IAS 37 b. Redundancy provision - no obligation exists as not announced to staff Dr Provisions Cr Administration Expenses W3 Gain on Disposal Goodwill on Acquisition 120,000 40,000 80,000 120,000 120,000 Adjust for intercompany sale only 350,000 350,000

Marks 4 0.5 0.5 (5 marks)

Cost of investment Group share of net assets [80% x 3,100,000] Goodwill Impairment 2006
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2,650,000 (2,480,000) 170,000 (110,000) 60,000

Parent company gain

Proceeds Cost of investment Parent gain

3,150,000 (2,650,000) 500,000

Group Gain - method 1 Parent gain Group share post acquisition profits disposed [(800 + (20 x 3/4 year)) - (3,100 - 2,600)] x 80% less impairment Group Gain - method 2 Net assets at 31 October 2007 Share capital Labels Retained earnings 1/1/07 Retained profit to 1 October 2006

500,000 252,000 (110,000) (142,000) 358,000

2,600,000 800,000 15,000 3,415,000

(Net Assets at date of disposal X Groups share after disposal) [3,415,000 x 0%] NIL + Sales Proceeds 3,150,000 Less (Net Assets at date of disposal X Groups share before disposal) [3,415,000 x 80%] (2,732,000) Less goodwill carrying amount (60,000) 358,000

W4 Share of profit of associate Group share of profits - 1 Jan to 31 December 2007 [30% x PAT of Pens Ltd.] Unrealised profit [ 100,000 x 1/2 x 20% margin x 30% group share]

18,000 (3,000) 15,000

No adjustment for sales amount from Paper PLC to Pens Ltd.

W5 Minority Interest Group MI per question Labels Ltd

[60,000 x 3/4 year x 20%]

54,000 3,000 57,000

W6 Retained Earnings 1/1/2007 Paper 3,100,000 Labels 800,000 (500,000) 300,000 Pens 180,000 (150,000) 30,000

Balance per SOCE at date of Acquisition Group share of Labels post acqn-80% Less goodwill impairment Group share of associate - 30%

240,000 (110,000) 9,000 3,239,000

NOTE:

The impairment of goodwill was subsequently deemed to be non-examinable as it was outside the syllabus for this examination. The above solution includes goodwill impairment. Students were awarded marks based on a profit on disposal of the shares and retained earnings brought forward, excluding the goodwill impairment.

Page 18

(c)

Distinguish between the consolidation method prescribed for subsidiaries and that prescribed for associates under the following headings: (i) Impact on the consolidated income statement (IS);

1.

Subsidiary Full amount included for all items in IS, including taxation. Individual line items shown. Minority interest shown separately.

2. 3.

Associate Group share of associate profit after taxation shown presented before the Group profit before tax. Individual line items (e.g. Revenue) not shown. No minority interest shown.

(ii)

Impact on the consolidated balance sheet (BS); Subsidiary Gross amount of assets and liabilities included in consol BS. Associate Investment in associate included in Non-current Assets = [Cost of investment + Group share of post acquisition retained earnings to date impairments.] or [Group share of net assets of associate + Goodwill impairments] No minority interest in relation to associate. Group share of post acquisition retained earnings of associate included in Group retained earnings. Goodwill not shown separately in Non-current assets - included in investment in associate

1.

2. 3.

4.

Minority interest based on shareholding not owned by parent included in equity. Group share of post acquisition retained earnings of sub included in group retained earnings. Goodwill shown separately in Non-current assets.

(iii)

Treatment of intra-group balances; and Subsidiary All intra-group trading and operational balances (incl. dividends) removed. All intra-group loan holdings removed. Associate No adjustment for intra-group trading and operational balances. Intra-group loans not removed.

1. 2.

(iv) Treatment of intra-group transactions. Subsidiary Group share of unrealised profits on intra-group transactions removed. Minority interest charged with any relevant amounts. Group Revenue and Cost of Sales adjusted for gross amount of intra-group sales. Associate Group share of unrealised profits only of intra-group transactions is removed. No minority interest. No adjustment for intra-group sales

1. 2. 3.

10 issues x 1 Mark = (10 Marks)

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Solution 3 1. 2. 3. (b) (a) Dividends paid Solution (c) Prince Plc Power Ltd Equipment NBV if not transferred = 0.8million (0.8 millionx20%) NBV at transfer value = 0.5million (0.5 millionx20%) Under valuation of equipment Consolidated NBV of PPE 4. (b) 15,000 According to IAS 37 Provisions, Contingent Liabilities and Contingent Assets a provision can only be made if there is an obligating event. As at 31 March there is no obligating event in relation to the fitting of the equipment (i.e. the equipment has not as yet been fitted) and therefore no provision can be provided. However, a provision for the potential fine of 15,000 may be accrued (see also Example 6, Appendix C of IAS 37). 5. 6. This area was not examinable in 2008. The marks were reallocated to other areas of question 3. (b) 800,000 Under IAS 38 Intangible Assets neither internally generated brands or advertising campaigns meet the definition of an intangible asset for inclusion on the balance sheet. Intangible assets must be amortised over their useful lives, which, in the case of the license, is five years. 7. (b) (i), (ii) and (iv) only NOTE: iii) Exclusion from consolidation of an entity with business activities dissimilar to the parent company. Is not allowed as per IAS 27 paragraph 20. 8. (d) EPS restated 2007 41.7 c 44.4 c 5.60 million 2.40 million 8.00 million 0.64 million 0.40 million

0.24 million 8.24 million

2007 - all shares held for the full year. No adjustment for bonus element required. 2006 - adjustment for bonus element required. Theoretical ex-rights price = 2 shares @ 4.50 1 share @ 3 3 shares @ 4.00 Adjustment = 0.50 x = 0.50 x =

9.00 3.00 12.00 Theoretical ex-rights price Actual cum rights price 4.00 4.50 44.4c

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Solution 4 (a) The main measurement requirements in respect of the revaluation model are as follows:
G

G G G

G G

Revaluations shall be made with sufficient regularity that the carrying amount does not differ materially from that which would be determined using fair value at the balance sheet date. Frequency of valuation is not mandated, but is required when a material difference occurs between carrying amount and fair value. Fair value is normally the market value at date of valuation on an arms length basis. Fair value is usually (but not required to be) appraised by a professionally qualified person. When an item of PPE is revalued, any accumulated depreciation on the asset to date is either: Restated proportionally with the change in the gross carrying amount so that the net equals the revalued amount; or Eliminated against the gross carrying amount and the net amount restated to the revalued amount; Depreciation is always charged on the new revalued amount. When one item of PPE is revalued, each item in the entire class of PPE to which the asset belongs must be revalued. 4 x 1.5 Mark = (6 Marks) Revaluation surplus: Recorded in G Equity as Revaluation reserve; movement shown in SOCE or G Income Statement only if reversing a previous revaluation decrease in the same asset that went through the Income statement previously Revaluation deficit: Recorded in G Income Statement expense or G Equity as Revaluation reserve movement shown in SOCE, only if, and to the extent of it reversing a previous revaluation surplus in the same asset that went through Equity previously. Any remaining deficit goes to the income statement 2 x 2 Marks = (4 Marks)

(b)

(c)

Extracts from financial statements 2001 Income Statement Depreciation charge Revaluation deficit Gain on disposal Balance sheet Non current assets Property plant & equipment Equity Revaluation surplus 310,000 2004 500,000 2007 200,000 20,000 1,600,000

7,690,000

9,200,000

400,000

2,630,000

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Workings Year ended 31/12/2001

I/S - Deprec Machine 10% x (2,000,000 - 400,000) Buildings 2.5% x 6,000,000

160,000 150,000 310,000 Depn 160,000 150,000 310,000 NBV 1,840,000 5,850,000 7,690,000

Marks 0.5 0.5

B/S NBV Machine Building

Cost 2,000,000 6,000,000 8,000,000

0.5 0.5

Year ended 31/12/2004 01/01/2004

Revalue Machine Cost 3yrs depreciation NBV @ 1/1/2004 Revalued amount Revaluation surplus Revalue Building Cost 3yrs depreciation NBV @ 1/1/2004 Revalued amount Revaluation surplus

2,000,000 480,000 1,520,000 1,700,000 180,000

6,000,000 450,000 5,550,000 8,000,000 2,450,000

31/12/2004 I/S Depreciation Machine [(1,700,000 - 500,000)/EUL] Buildings [8,000,000/EUL] 300,000 200,000 500,000 0.5 0.5

B/S Property, plant and Equipment Cost/reval Machine 1,700,000 Building 8,000,000 9,700,000 Equity Revaluation Surplus Year ended 31/12/2007 01/01/2007 Machine Cost/ valuation 3yrs depreciation on valuation NBV @ 1/1/2007 Revalued amount Revaluation deficit Deficit charged Reval reserve - max = 2004 surplus I/S - deficit Total Deficit

Depn 300,000 200,000 500,000

NBV 1,400,000 7,800,000 9,200,000 2,630,000

0.5 0.5

1,700,000 900,000 800,000 600,000 ( 200,000) 180,000 20,000 200,000

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31/12/2007 Building sold Proceeds Carrying amount Gain on disposal - IS I/S Depreciation charge Machine [(600,000 200,000)/EUL] Revaluation deficit Gain on Disposal of Building 9,000,000 7,400,000 1,600,000

Valuation Acc Dep - 3 yrs

8,000,000 ( 600,000)

200,000 20,000 1,600,000

0.5 1.5 1.5

B/S Property, plant and Equipment Cost/reval Machine 600,000 600,000 Revaluation reserve- proof of movements Building Opening balance 2,450,000 Disposal ( 2,450,000) Revaluation deficit Closing Balance 0

Depn 200,000 200,000

NBV 400,000 400,000

0.5

Machine 180,000 ( 180,000) 0

Total 2,630,000 ( 2,450,000) ( 180,000) 0 (10 marks)

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Solution 5 (a) Foreign currency translation is the process of converting the annual financial statements of a foreign subsidiary or associate company from the foreign currency into the home or presentation currency of the parent company. Presentation currency is the currency in which a company presents its financial statements. This is not necessarily the same as its functional currency. 2 x 1 Mark = (2 Marks)

(b)

Describe the factors that would help an entity determine its functional currency in accordance with IAS 21. The functional currency of an entity is the currency of the primary economic environment in which the reporting entity operates and spends cash. Consideration of the following issues would help determine the functional currency: (IAS 21 para 9)
G

the currency that mainly influences sales prices for goods and services (often the currency in which prices are denominated and settled); the currency of the country whose competitive forces and regulations mainly determine the sales prices of its goods and services; the currency that mainly influences labour, material and other costs of providing goods and services (often the currency in which such costs are denominated and settled); the currency in which funds from financing activities are generated; (IAS 21 para 10) and the currency in which receipts from operating activities are usually retained (IAS 21 para 10).

An entity's functional currency reflects the underlying transactions, events and conditions that are relevant to it. (IAS 21 para 13) In most cases the functional currency is the currency of the country in which the entity is situated and carries out the majority of its transactions. 6 points x 1 Mark = (6 Marks)

(c)

For an individual company, the two main causes of a foreign exchange difference in relation to the purchase of goods from a foreign currency supplier are: (i) (ii) A difference between the exchange rate at which the goods are recorded as purchased and the rate on the day when payment is made. A difference between the exchange rate when the goods are purchased and recorded in Payables and the rate at the balance sheet date (a monetary liability is re-translated to the closing rate at the balance sheet date.) 2 x 1 Mark = (2 Marks)

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(d) (i) 15 November Purchases of goods in a foreign currency are translated at the FX rate on the date of purchase. Dr Cr Purchases Trade Payables 58,824

58,824

Being the cost of goods purchased for A$100,000 [ 100,000/ 1.7] On 18 December, Northside pay for half the goods, i.e. A$50,000 or 29,412, (58,824 /2). At the rate ruling on that date, 1.80, this costs 27,778 [50,000/1.80]. Dr Cr Cr Trade Payables Income statement exchange gain Bank 29,412

1,634 27,778

On 31 December, the outstanding trade payables liability in the balance sheet must re-translated at the rate ruling on that date as it is a monetary amount. There is now A$50,000 outstanding. This is translated at 1.75 to 28,571, giving an exchange gain of 841 [29,412 28,571]. Dr Cr Trade Payables Income statement exchange gain 841

841

7 entries x 1 Mark = (7 Marks) (d) (ii) Income Statement for the year ended 31 December 2007 Gain on foreign exchange [1,634 + 841] 2,475

Balance sheet as at 31 December 2007 Current Assets Inventories Current Liabilities Trade Payables

14,706

28,571

NOTES: (i) At 31 December the balance sheet liability for trade payables is at the amount of A$50,000 re-translated at the balance sheet rate of A$1.75 The stock is valued at cost, i.e, 1/4 x 58,824 = 14,706 and is NOT re- translated.

(ii)

3 entries x 1 Mark = (3 Marks)

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