financial reporting 2012

Examiners’ commentaries 2012

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AC3091 Financial reporting

Important note

This commentary reflects the examination and assessment arrangements for this course in the academic year 2011–2012.

From 2012–2013 the format of the examination paper will change. The paper will be divided into two sections, Section A and Section B. Section A will contain four questions, which will combine numerical and written components, and Section B, which will contain two essay questions. Candidates will be required to answer four questions with at least one question from each section. All questions will carry equal marks. The style of questions will remain unchanged.

Information about the subject guideUnless otherwise stated, all cross-references will be to the latest version of the subject guide (2012).

General remarks

Learning outcomes At the end of this course, and having completed the Essential reading and activities, you should be able to:

• explain and apply a number of theoretical approaches to financial accounting

• record and analyse data

• prepare financial statements under alternative accounting conventions

• describe a number of regulatory issues relating to financial accounting

• critically evaluate theories and practices of, and other matters relating to, financial accounting.

What are the Examiners looking for? The combined questions in Section A will require candidates to prepare calculations on a variety of topics as well as showing a critical grasp of the theories underlying the techniques. To do well, candidates need to be able both to explain and evaluate the theories and prepare a range of financial statements and calculations.

For quantitative parts of questions, Examiners are looking for the accurate preparation of financial statements that follow generally accepted formats with clear headings and accurate application of accounting techniques to specific areas within financial reporting. Workings should always be clearly provided.

Written components of combined questions require clear and coherent explanations of theories, techniques and practices. Candidates must critically evaluate theories and practices.


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Good answers to essay-based questions in Section B will be structured coherently and logically. It will include an introduction, a main body and conclusion, and cover all parts of the essay question.

Typically, an essay-based question will require an explanation of an issue within financial reporting and a critical analysis of the issue. Explanations should be clear and include a discussion of key definitions, with examples if appropriate. The analysis should show critical awareness of both sides of an argument or the application of a theory or concept to financial reporting, with an assessment of its appropriateness to financial reporting.

Planning your time in the examination All questions in the examination paper carry equal marks and equal time should be devoted to each question. It is important that candidates attempt four questions and all parts of each question they answer. Marks for each section are shown and should be used by candidates to guide their work and time allocation. Where questions are in parts, candidates should avoid excessively long answers to some parts and missing out other parts.

Key steps to improvement Candidates can improve their performance by improving the presentation of their work, providing clear workings, answering the required number of questions and attempting all sections of a question. Often candidates seem to focus attention on the preparation of financial statements and the financial calculations without being able to explain, discuss and evaluate the theories and practices central to financial reporting.

Question spotting

Many candidates are disappointed to find that their examination performance is poorer than they expected. This can be due to a number of different reasons and the Examiners’ commentaries suggest ways of addressing common problems and improving your performance. We want to draw your attention to one particular failing – ‘question spotting’, that is, confining your examination preparation to a few question topics which have come up in past papers for the course. This can have very serious consequences.

We recognise that candidates may not cover all topics in the syllabus in the same depth, but you need to be aware that Examiners are free to set questions on any aspect of the syllabus. This means that you need to study enough of the syllabus to enable you to answer the required number of examination questions.

The syllabus can be found in the Course information sheet in the section of the VLE dedicated to this course. You should read the syllabus very carefully and ensure that you cover sufficient material in preparation for the examination.

Examiners will vary the topics and questions from year to year and may well set questions that have not appeared in past papers – every topic on the syllabus is a legitimate examination target. So although past papers can be helpful in revision, you cannot assume that topics or specific questions that have come up in past examinations will occur again.

If you rely on a question spotting strategy, it is likely you will find yourself in difficulties when you sit the examination paper. We strongly advise you not to adopt this strategy.


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AC3091 Financial reporting – Zone A

Important note




Comments on specific questions

Candidates should answer FOUR of the following SEVEN questions. All questions carry equal marks.

Question 1

The income statements for the year ended 31 December 2011 and the statements of financial position as at 31 December 2011 for J Plc, L Ltd and R Ltd are given as follows:

Income statements for the year ended 31 December 2011

J Plc L Ltd R Ltd£’000 £’000 £’000

Turnover 2,900 2,100 1,200Cost of sales (600) (900) (800)Gross profit 2,300 1,200 400Operating expenses (650) (480) (90)Dividend receivable 180Profit before tax 1,830 720 310Tax (720) (210) (250)Profit after tax 1,110 510 60Dividends payable (150) (120) (10)Net profit for the year 960 390 50Retained profit brought forward 1,500 900 200Retained profit carried forward 2,460 1,290 250

[For the full question please refer to the Examination paper]


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Reading for this question

Subject guide, Chapter 5.

Alexander, D., A. Britton and A. Jorissen International Financial Reporting and Analysis. (Andover: Cengange Learning EMEA, 2011) fifth edition [ISBN 9781408032282] Chapter 24.

Approaching the question

You are required to prepare a consolidated statement of financial position and a consolidated income statement. These are presented below with workings on how to obtain the figures. Please ensure you record your workings in your answer.

Statement of financial position

Non current assets 3,300,000 Working 1Investments 1,500,000 Working 2Goodwill 320,000 Working 3Share in R (associate) 135,200 Working 4Inventories 890,000 Working 5Interco from R 15,000Mgt fee from R 12,000Cash 1,075,000 Working 6

7,247,200

Share capital 600,000 H onlyRetained earnings 2,593,400 Working 7NCI 363,800 Working 8Trade payables 990,000 H+SBonds 2700,000 H+S

7,247,200

Income statement

Revenue 4,900,000 Working 9Cost of sales (1,410,000) Working 10Gross profit 3,490,000Investment income/ Div rec 80,000 Working 11Operating expenses (1,130,000) H+SMgt fee from R 12,000Share in R 119,200 Working 12impairment (320,000)Profit before tax 2,251,200Tax (1,030,000) Working 13Profit after tax 1,221,200NCI (97,800) Working 14Profit after tax and mint 1,123,400Dividends (150,000) H onlyProfit for the year 973,400Retained profit bfwd 1,620,000 Working 15Retained profit cfwd 2,593,400


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Key workings (In £’000)

Working 1 – non current assets = H + S + revaluation of S = 600 + 2,400 + 300

Working 2 – investments = total investments less cost of S less cost of A = 300 – 1,200 – 600

Working 3 – Goodwill = cost of investment – H’s share of group companies net assets at fair value at acquisition – impairment

Shares in R 1,200 – 80% * 1,200 = 240

Shares in L 600 – 40% * 500 = 400

Goodwill = 640 – 320 = 320

Working 4 – share in associate

Either H’s share in A’s net assets at SFP date at SFP date at fair value = 40% * 338 = 135.2

(reserves table given at end)

Or SFP share in R calculated as cost + share of post acqn reserves –impairment = 600 + 40% * (238 – 400) – 200 = 335.2

Working 5 – inventories

H+S – provision for unrealised profit

Working 6 – cash

H+S+cash in transit = 795 + 270 + 10

Working 7 – retained earnings

= H + H’s share of S’s post acquisition reserves + H’s share of S’s post acquisition reserves – impairment =

2,483 + 80% * (1,269 – 650) + 40% * (238 – 400) – 350 = 2,483 + 495.2 – 64.8 – 320 = 2,593.4

Working 8 – non controlling interest

= NCI % of S’s net assets at SFP date at fair value

= 20% * 1,819 = 363.8

Reserves table

J L RP+L 2,460 1,290 250Purp (10)Mgt fee payable (21) (12)Mgt fee rec from s 21Mgt fee rec from a 12Revised P+L 2,483 1,269 238Share cap 600 250 100Revaln res 300Revised capital and reserves 3,083 1,819 338

Income statement

Working 9 – sales

H + S – intercompany sales = 2,900 + 2,100 – 100

Working 10 – cost of sales

H+S-intercompany sales + unrealised profit on inventory between H and S = 600 + 900 – 100 + 10


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Working 11 – investment income

Total investment income – dividends receivable from S – dividends receivable from A = 180 – (0.80 * 120) – (0.4 * 10)

Working 12 – share in R

H’s share of A’s profit before tax – unrealised profit on inventory between H and A = 40% * (310 – 12)

Working 13 – tax

H + S + H’s share of A = 720 + 210 + 0.4 * 250

Working 14 – Non-controlling interest (NCI)

NCI % of S’s profit after tax less unrealised profit on inventory = 20% * (510 – 21)

Working 15 – retained profit brought forward = H + H’s share of S post acquisition + H’s share of A post acquisition – impairment to start of period = 1,500 + 80% * (900 – 650) + 40% * (200 – 400) = 1,500 + 200 – 80

Question 2

On 1 January 2011, Fast Ltd acquired 80% of the ordinary shares of a subsidiary, Slow Org, which operates in the currency ‘potts’, when Slow Org was incorporated with share capital of 1,840,000 ‘potts’. No shares have been issued by Slow Org since acquisition.

The summary statements of financial position and income statements of Fast Ltd and Slow Org are as follows:




Britton and Jorissen (2011) Chapter 29.


In part (a) you are required to describe the different foreign exchange methods and to compare these methods. Both methods should be outlined and clear comparisons between the two methods identified. These comparisons should include which rates to use, where FX is included and the treatment of goodwill.

The calculations for parts (b), (c) and (d) on translating the foreign exchange subsidiary using the closing rate method and calculating foreign exchange on net assets and goodwill and the consolidated foreign reserve and non-controlling interest are given as follows:

Part (b)

SFP Rate Trans slowNca 2,380,000 5 476,000Invest

Interco recOther net assets 400,000 5 80,000Inteco pay (240,000) 5 (48,000)Net assets 2,540,000 508,000


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Share cap 1,840,000 2 920,000Profit for year 700,000 P+L 175,000FX loss Bal (587,000)Cap + res 2,540,000 508,000

Income statement

RateSales 4,000,000 4 1,000,000

Cost of sales (2,000,000) 4 (500,000)2,000,000 500,000

Depn (600,000) 4 (150,000)Other exp (200,000) 4 (50,000)pbt 1,200,000 300,000tax (500, 000) 4 (125,000)Pat 700,000 175,000

Part (c): Calculation of how the differences arise

Opening net assets

Opening net assets at opening rate 1,840,000/2 920,000

Opening net assets at closing rate 1,840,000/5 368,000

FX loss (552,000)

Profit / income

Pat at average rate 700,000/4 175,000

PAT at closing rate 700,000/5 140,000

FX loss (35,000)

Total FX loss = (587,000)

Part (d)

FX reserve = 80% * (587,000) = 469,600

NCI = 20% * 2,540,000 = 508,000 Potts = 508,000/5 = £101,600


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Question 3

Construction Plc has entered into a construction contract, contract X and Build Plc has entered into a construction contract, contract Y. Contracts X and Y started on 1 January 2011. The position on each contract at 31 December 2011 was as follows:

X Y£ £

Contract price 48,000 9,000

Value of work certified to date 40,000 4,500

Cost of work to date 30,420 3,600

Estimated additional costs to completion

8,580 13,200

Payments on account 37,200 4,320

Construction Plc uses the cost method for assessing percentage completion and Build Plc uses the value of work certified method for assessing percentage completion.






Part (a)

You are required to give a clear definition of construction contracts. The concepts of relevance and reliability need to be defined and the accounting treatment following from each of these concepts needs to be identified. The impact of the application of the different treatments needs to be discussed.

Part (b)

Workings for how contract x and contract y should be accounted for are given below:

Contract X

In the income statement

Profit on contract = 48,000 – 30,420 – 8,580 =9,000

% completion = 30,420/39,000 =

Sales = 0.78 * 48,000 = 37,440 Cost of sales = 30,420

Attributable cumulative profit = 7,020

In the statement of financial position

Construction contract balance = costs to date + attributable profit – payments on account = 30,420 + 7,020 – 37,200 = 240

Contract Y

In the income statement

Loss on contract = 9,000 – 3,600 – 13,200 = (7,800)

Foreseeable loss = (7,800)

Sales = 50% * 9,000 = 4,500


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Cost of sales = 50% * (3,600 +13,200) = 8,400

Provision for F loss = (3,900)

In the statement of financial position

Construction contract balances = costs to date – foreseeable loss – payments on account =3,600 – 7,800 – 4,320 = (8,520)

Question 4

Foam Ltd started trading on 1 January 2011. The income statement and the statement of financial position for the first year of trading are given as follows:

Income statement for 2011 £ £

Sales 950,000

Cost of sales: Opening inventory 150,000 Purchases 600,000 Closing inventory (120,000)

(630,000)Gross profit 320,000

Depreciation (40,000)Other expenses (180,000)Net profit 100,000

Statement of financial position at 31 December 2011£

Non current assetsBuildings – net book value 360,000Current assetsInventory 120,000Cash 200,000Total assets 680,000

Share capital 500,000Profit and loss account reserve 100,000Trade payables 80,000Capital, reserves and liabilities 680,000

[For the full question please refer to the Examination paper.]



Britton and Jorissen (2011) Chapters 5, 6 and 7.

Ijiri, Y. ‘A Defence for Historical Cost Accounting’ in R. Sterling (ed.) Asset Valuation and Income Determination. (Lawrance, KA: Scholars Book Co., 1971) [ISBN 9780914348115].


(a) You are required to define historical cost accounting and discuss both the advantages and limitations of historic cost accounting. A good discussion is to be found in the subject guide; you may wish to look at Ijiri’s chapter on the defence of historical cost accounting as mentioned in the subject guide too.

(b) You need to clearly define and explain replacement cost, giving appropriate examples to illustrate your definition and explanation.


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Both the advantages and limitations of replacement cost need to be clearly discussed.

(c) You need to present clear explanations of realised and unrealised holding gains on non-current assets.

(d) The solutions to the replacement cost financial statements with key adjustment indices are given as follows:

SFP £ Rate Cv kiwiNca 360,000 230/200 414,000

Invent 120,000 250/215 139,535Cash 200,000 200,000

Net assets 680,000 753,535

Share cap 500,000 500,000Ret profit 100,000 71,714T pay 80,000 80,000

Unrealised nca 54,000 RC NCA – HC NCA

Realised nca 6,000RC depreciation – HC depreciation

Real inventory 22,286RC cost of sales – HC cost of sales

Unrealised inventory 19,535RC closing inventory – HC closing inventory

Cap + res 680,000 753,535

Income statement

£ Cv kiwiSales 950,000 950,000Op invnt 150,000 190/180 158,333Purch 600,000 600,000Cl invnet (120,000) 190/215 (106,047)

(630,000) (652,286)G profit 320,000 297,714Exp (180,000) (180,000)Depn (40,000) 230/200 (46,000)

Net profit 100,000 71,714


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Question 5

(a) On 1 July 2011, Help Ltd issued an additional 1 million ordinary shares with nominal value of 50p for £12.50 per share. The costs of this share issue totalled 1% of the total money raised in the share issue. After this share issue, Help Ltd issued bonus shares, in respect of all its shares, on a 1 for 5 basis. Before the share issue and the bonus issue Help Ltd’s share capital and reserves were as follows:

£Ordinary share capital 1,250,000Ordinary share premium 3,750,000Preference share capital 1,000,000Profit and loss account reserve 40,000,000



Subject guide, Chapters 6, 9, 10 and 12.

Britton and Jorissen (2011) Chapters 15, 16, 18, 26, 27 and 29.


You are required to answer all parts of the questions. Indicative solutions and workings are given as follows:

(a) after new issue £

Ordinary share capital (nominal value 50p) 1,750,000Ordinary share premium 15,625,000Preference share capital 1,000,000Profit and loss account reserve 40,000,000

(b) after bonus issue £

Ordinary share capital (nominal value 50p) 2,100,000Ordinary share premium 15,275,000Preference share capital 1,000,000Profit and loss account reserve 40,000,000

Sales 9,880,000

Cost of sales

Mined copper 100,000 * £84 = £8,400,000Closing inventory = 60,000 * £84 = (£5,040,000)

Cost of sales (3,360,000)

6,520,000

Admin (156,000)

Delivery (84,000)

Net profit 6,280,000

Closing inventory = direct cost plus depletion of mine plus depreciation of equipment = £70 + 1,260,000/100,000 + 140,000/100,000 = 70 + 12.6 + 1.4 = £84 =

(c) Earnings per share, gearing and return on equity need to be defined briefly and the impact of increasing long-term debt on each of the ratios needs to be discussed.


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(d) A definition of post balance sheet events needs to be provided and the treatment of post balance sheet events needs to be clearly explained. Answers should also address why the area is important to users.

(e) June 2011

Machine £10,000

payable £10,000

December 2011

Machine £10,000

payable £8,333

P+L £1,667 gain

Question 6

Either

Discuss the reasons for initiating standard setting in the UK in the 1970s and critically assess the development in accounting standards in the UK since then.

Or

Discuss and critically assess Hicks’ measures of income and the implications of these measures of income for financial reporting.

Reading for the ‘Either’ part of this question



Approaching the ‘Either’ part of this question

You need to discuss the process of standard setting in the UK, incorporating the definition of an accounting standard. You need to discuss the key reasons for standard setting in the 1970s and any changes since then, for example, changes in response to the Dearing review and introduction of International Financial Reporting Standards (IFRS). It is particularly important to provide a critical assessment of standard setting and the key changes. Please read as widely as possible, including the Further readings for this topic in the subject guide.

Reading for the ‘or’ part of this question



Approaching the ‘or’ part of this question

You need to discuss the key definitions of Hicks measures of income and give explanations as well as equations. You might find it helpful to illustrate this discussion with appropriate examples. It is important that you also discuss the advantages and limitations of the different measures in detail and focus particular attention on the implications for financial reporting and how appropriate the measures are for financial reporting. Please read as widely as possible, including the Further readings for this topic in the subject guide.


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Question 7

Either

Define goodwill and discuss the accounting concepts used to determine the accounting treatment of goodwill. Compare and contrast SSAP 22 on goodwill with IAS 38 on intangibles as it relates to goodwill and critically assess these standards.

Or

Discuss the concept of substance over form, illustrating your answer with reference to finance and operating leases. Compare and contrast the accounting for finance and operating leases and discuss the different impact that accounting for finance and operating leases has on financial statements.

Reading for the ‘Either’ part of this question



Approaching the ‘Either’ part of this question

You are required to define goodwill and give examples of goodwill. You also need to define and discuss the key concepts of matching and prudence in determining the accounting treatment of goodwill. The discussion should include how these concepts have changed over time and why. You need to provide outlines (brief summaries) of SSAP 22 and IAS 38 and compare these two standards. Particularly important is the critical assessment of advantages and limitations of each of the standards, which should be clearly discussed. Please read as widely as possible, including the Further readings for this topic in the subject guide.



Britton and Jorissen (2011) Chapters 16 and 18.


You need to define and discuss and give examples of the concept of substance over form, for example, leases, quasi subsidiaries, consignment stock, sale and repurchase agreements, and debt factoring. You should explain both types of leases and identify how they are accounted for. You need to discuss the impact of the different accounting treatments on the financial statements and illustrate this with appropriate examples. You also need to discuss the impact of the different treatments on financial statements, perhaps with reference to economic consequences and accounting ratios. Please read as widely as possible, including the Further readings for this topic in the subject guide.


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Present Value TablesDiscount rates (r) %

time / 1 2 3 4 5 6 7 8 9 10Periods(n)1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.9092 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.8263 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.7514 0.961 0.924 0.888 0.855 0.823 0.792 0.763 0.735 0.708 0.6835 0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.6216 0.942 0.888 0.837 0.790 0.746 0.705 0.666 0.630 0.596 0.5647 0.933 0.871 0.813 0.760 0.711 0.665 0.623 0.583 0.547 0.5138 0.923 0.853 0.789 0.731 0.677 0.627 0.582 0.540 0.502 0.4679 0.914 0.837 0.766 0.703 0.645 0.592 0.544 0.500 0.460 0.42410 0.905 0.820 0.744 0.676 0.614 0.558 0.508 0.463 0.422 0.38611 0.896 0.804 0.722 0.650 0.585 0.527 0.475 0.429 0.388 0.35012 0.887 0.788 0.701 0.625 0.557 0.497 0.444 0.397 0.356 0.31913 0.879 0.773 0.681 0.601 0.530 0.469 0.415 0.368 0.326 0.29014 0.870 0.758 0.661 0.577 0.505 0.442 0.388 0.340 0.299 0.26315 0.861 0.743 0.642 0.555 0.481 0.417 0.362 0.315 0.275 0.239

Discount rates (r) %

time / 11 12 13 14 15 16 17 18 19 20periods(n)1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.8332 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.6943 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.5794 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.4825 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.4026 0.535 0.507 0.480 0.456 0.432 0.410 0.390 0.370 0.352 0.3357 0.482 0.452 0.425 0.400 0.376 0.354 0.333 0.314 0.296 0.2798 0.434 0.404 0.376 0.351 0.327 0.305 0.285 0.266 0.249 0.2339 0.391 0.361 0.333 0.308 0.284 0.263 0.243 0.225 0.209 0.19410 0.352 0.322 0.295 0.270 0.247 0.227 0.208 0.191 0.176 0.16211 0.317 0.287 0.261 0.237 0.215 0.195 0.178 0.162 0.148 0.13512 0.286 0.257 0.231 0.208 0.187 0.168 0.152 0.137 0.124 0.11213 0.258 0.229 0.204 0.182 0.163 0.145 0.130 0.116 0.104 0.09314 0.232 0.205 0.181 0.160 0.141 0.125 0.111 0.099 0.088 0.07815 0.209 0.183 0.160 0.140 0.123 0.108 0.095 0.084 0.074 0.065


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AC3091 Financial reporting – Zone B

Important note




Comments on specific questions

Candidates should answer FOUR of the following SEVEN questions. All questions carry equal marks.

Question 1

The income statements for the year ended 31 December 2011 and the statements of financial position as at 31 December 2011 for Book Plc, Read Ltd and Buy Ltd are given as follows:

Income statements for the year ended 31 December 2011

Book Plc Read Ltd Buy Ltd£’000 £’000 £’000

Turnover 8,700 6,300 3,600Cost of sales (1,800) (2,700) (2,400)Gross profit 6,900 3,600 1,200Operating expenses (2,950) (1,440) (270)Dividend receivable 540 – –Profit before tax 4,490 2,160 930Tax (1,160) (630) (750)Profit after tax 3,330 1,530 180Dividends payable (450) (360) (30)Net profit for the year 2,880 1,170 150Retained profit brought forward 4,500 2,700 600Retained profit carried forward 7,380 3,870 750



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Alexander, D., A. Britton and A. Jorissen International Financial Reporting and Analysis. (Andover: Cengange Learning EMEA, 2011) fifth edition [ISBN 9781408032282] Chapter 24.


You are required to prepare a consolidated statement of financial position and a consolidated income statement. These are presented below with workings on how to obtain the figures. Please ensure you record your workings in your answer.

Statement of financial position

Non current assets 9,900,000 Working 1 Investments 4,500,000 Working 2 Goodwill 960,000 Working 3Share in Buy 405,600 Working 4Inventories 2,670,000 Working 5 Interco from Buy 55,000Mgt fee a 36.000Cash 3,225,000 Working 6

21,751,600

Share capital 1,800,000 H onlyRetained earnings 7,780,200 Working 7NCI / Minority interests 1,091,400 Working 8Trade payables 2,980,000 H+SBonds 8,100,000 H+S

21,751,600

Income statement

Revenue 14,700,000 Working 9Cost of sales (4,230,000) Working 10Gross profit 10,470,000Investment income/ Div rec 240,000Operating expenses (4,390,000) Working 11Mgt fee from Buy 36,000Share in Buy 357,600 Working 12Impairment (960,000)Profit before tax 5,753,600Tax (2,090,000) Working 13 Profit after tax 3,663,600NCI/Minority interest (293,400) Working 14 Profit after tax and mint 3,370,200Dividends (450,000)Profit for the year 2,920,200Retained profit bfwd 4,860,000 Working 15 Retained profit cfwd 7,780,200


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Key workings (in £’000)

Working 1 ‒ non current assets = H + S + revaluation in S = 1,800 + 7,200 + 900

Working 2 ‒ investments = total investment – cost of S – cost of A = 9,900 – 3,600 – 1,800

Working 3 ‒ Goodwill = cost of investment in group company – H’s share of group companies net assets at fair value at acquisition

Shares in Read 3,600 – 80% * 3,600 = 720

Shares in Buy 1,800 – 40% * 1,500 = 1,200

Goodwill = 1,920 – 960 = 960

Alternatively goodwill of A can be included in the share in associate figure

Working 4 share in Buy = H’s share of A’s net assets at fair value at SFP date = 40% * 1,014 = 405.6 (from reserves table below) with goodwill included in goodwill figure.

alternative = SFP share in Buy calculated as cost + share of post acqn reserves –impairment = 1,800 + 40% * (714 – 1,200) – 600 = 1,005.6

Working 5 ‒ inventories = H+S-provision for unrealised profit between inventory between H and S = 900 + 1,800 – 30

Working 6 ‒ cash = H + S + cash in transit = 2,385 + 810 + 30

Working 7 ‒ retained earnings = H + H’s share of S’s post acquisition reserves + H’s share of S’s post acquisition reserves –impairment =

7,449 + 80% * (3,807 – 1,950) + 40% * (714 – 1,200) – 960 = 7,449 + 1,485.6 – 194.4 – 960 = 7,780.2

Working 8 ‒ non controlling interest = NCI % of S’s net assets at SFP date at fair value = 20% * 5,457 = 1,091.4

Reserves table

Book Read BuyP+L 7,380 3,870 750Purp (30)Mgt fee payable (63) (36)Mgt fee rec from s 63Mgt fee rec from a 36Revised P+L 7,449 3,807 714Share cap 1,800 750 300Revaln res 900Revised capital and reserves 9,249 5,457 1,014

Income statement

Working 9 ‒ sales = H +S – intercompany sales = 8,700 + 6,300 – 300

Working 10 ‒ cost of sales = H + S-intercompany sales +unrealised profit on inventory between H and S = 1,800 + 2,700 ‒ 300 + 30

Working 11 ‒ investment income = Total investment income – dividends receivable from S – dividends receivable from A = 540 ‒ (0.80 * 360) ‒ (0.4 * 30)

Working 12 ‒ share in r

H’s share of A’s profit before tax – unrealised profit on inventory between H and A = 40% * (930 ‒ 36)


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Working 13 ‒ tax

H + S + H’s share of A = 1,160 + 630 +0.4 * 750

Working 14 ‒ Non controlling interest

NCI % of S’s profit after tax less unrealised profit on inventory = 20% * (1,530 ‒ 63)

Working 15 ‒ retained profit brought forward

= H + H’s share of S post acquisition + H’s share of A post acquisition – impairment

Question 2

On 1 January 2001, Pear Ltd acquired 80% of the ordinary shares of a subsidiary, Kiwi Org. Kiwi Org trades in the currency ‘potts’. On 1 January 2001 the balance on the accumulated profits of Kiwi Org was 40,000 ‘potts’ and the share capital of Kiwi Org was 300,000 ‘potts’.

The summary income statements and statements of financial position of Pear Ltd and Kiwi Org are given as follows:

Statement of financial position as at 31 December 2011Kiwi Pear‘potts’ £

Non-current assets – land 461,000 185,000Investment in Kiwi – 30,000

Inventories 75,000 180,000

Inter-company receivable from Kiwi – 8,000Cash 25,000 22,000Inter-company payable to Pear (16,000) –Total assets less liabilities 545,000 425,000

Share capital 300,000 180,000Profit and loss account reserve brought forward

100,000 120,000

Profit for the year 145,000 125,000Capital and reserves 545,000 425,000

Income statement Kiwi Kiwi Pear Pearyear ended 31 December 2010 ‘potts’ ‘potts’ £ £Sales 380,000 760,000

Opening inventory 50,000 40,000Purchases 200,000 500,000Closing inventory (75,000) (55,000)Cost of sales (175,000) (485,000)Gross profit 205,000 275,000Other expenses (25,000) (80,000)Profit before tax 180,000 195,000Tax (35,000) (70,000)Profit after tax 145,000 125,000






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You are required to translate the income statement using the temporal method, prepare a consolidated income statement using the temporal method and calculate goodwill. The workings are shown below.

Part (a)

SFP needed to calculate net profit for the year

SFP Rate Trans kiwi

Nca 461,000 10 46,100InvestGWInvent 75,000 3 25,000cash 25,000 2 12,500Interco recInterco pa (16,000) 2 (8,000)Net assets – 545,000 75,600

Share cap 300,000 10 30,000P+L bfwd 100,000 Given 20,000Profit for year 145,000 Bal 25,600

Cap + res 545,000 75,600

Income statementRate

Sales 380,000 4 95,000Op invnt 50,000 4.5 11,111Purch 200,000 4 50,000Cl invnet (75,000) 3 (25,000)

(175,000) (36,111)205,000 58,889

Exp (25,000) 4 (6,250)FX (18,289)

pbt 180,000 34,350tax (35,000) 4 (8,750)Pat 145,000 25,600

Part (b)

Consolidated income statementkiwi pear cons

Sales 95,000 760,000 855,000Cost of sales (36,111) (485,000) (521,111)Gross profit 58,889 275,000 333,889Exp (6,250) (80,000) (86,250)FX (18,289) (18,289)

Pbt 34,350 195,000 229,350Tax (8,750) (70,000) (78,750)Pat 25,600 125,000 150,600Nc1 (5,120)Pat and nci 145,480


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Part (c)

Goodwill = cost in investment in currency – H’s share of net assets of S in currency at fair value at acquisition date = 30,000 * 10 – 80% (340,000) = 28,000

Goodwill in sfp in £ = 28,000/10 = 2,800

Part (d)

You are required to outline both methods and identify clear comparisons between the two methods. These comparisons should include which rates to use, where FX is included and the treatment of goodwill. The functional currency needs to be defined and the factors which determine the functional currency need to be discussed.

Question 3

Boat Plc has the following projected information:

Year ended 31 December Profit before depreciation Capital allowances Depreciation 2012 60,000 19,200 3,8402013 57,600 3,840 15,3602014 52,800 3,840 11,5202015 48,000 26,880 7,680

The tax rate for Boat Plc is 35%. There is no deferred tax balance brought forward as at 1 January 2012.

Required

(a) Discuss the method for calculating tax in the UK and how tax is accounted for in financial statements. (5 marks)

(b) What is deferred tax and why is it needed? (5 marks)

(c) What are permanent and temporary differences within deferred tax and how are they treated for deferred tax purposes? (5 marks)

(d) Show the tax and deferred tax in the income statements and the deferred tax in the statements of financial position for Boat Plc for the years 2012 to 2015 under the flow through and full provision methods. (10 marks)






Part (a)

You are required to give an outline of the UK tax system and outline how tax is accounted for in income statements and statements of financial position. This part did not need any explanation of deferred tax.

Part ( b)

You need to define deferred tax and clearly discuss the different reasons why deferred tax is needed.

Part (c)

You need to define both permanent and temporary differences, giving appropriate examples. You also need to explain how these are treated within deferred tax.


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Part (d)

The calculations for deferred tax in the years 2012 to 2015 are indicated below: Flow through 2012 2013 2014 2015

Profit 60,000 57,600 52,800 48,000CA (19,200) (3,840) (3,840) (26,880)Tax profit 40,800 53,760 48,960 21,120

Tax 35% 14,280 18,816 17,136 7,392D tax 0 0 0 0

Full provisionTax 14,280 18,816 17,136 7,392D tax P+L * 5,376 (4,032) (2,688) 6,720D tax – B/s 5,376 1,344 (1,344) 5,376

*CA 19,200 3,840 3,840 26,880 Depn 3,840 15,360 11,520 7,680CA-dpn 15,360 (11520) (7,680) 19,20035% d tax 5,376 (4,032) (2,688) 6,720

Question 4

Hat Ltd started trading on 1 January 2011. The income statement and the statement of financial position for the first year of trading are given as follows:

Income statement for 2011 £ £Sales 1,900,000

Cost of sales Opening inventory 300,000 Purchases 1,200,000 Closing inventory (240,000)

(1,260,000)Gross profit 640,000Depreciation (80,000)Other expenses (260,000)Profit before tax 300,000Tax (100,000)Profit after tax 200,000




Britton and Jorissen (2011) Chapters 5, 6 and 7.


Part (a)

You are required to give a clear definition of current purchasing power financial statements, including definitions of all key terms. You also need to explain and discuss the need and advantages of current purchasing power financial statements. In addition, you need to define the net monetary capital adjustment and discuss why this adjustment is required.


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Part (b)

You need to clearly explain the concept of financial capital maintenance and how this is associated with CPP.

Part (c)

The CPP financial statements are presented below.

SFP £ Rate CPP

Nca 720,000 190/150 912,000

Invent 240,000 190/170 268,235Cash 600,000 600,000

Net assets 1,560,000 1,780,235

Share cap 1,200,000 190/150 1,520,000Ret profit 200,000 Bal 100,235T pay 160,000 160,000

1,560,000 1,780,235

Income statement

£ Cpp hatSales 1,900,000 190/160 2,256,250Op invnt 300,000 190/150 380,000Purch 1,200,000 190/160 1,425,000Cl invnet (240,000) 190/170 (268,235)

(1,260,000) (1,536,765)G profit 640,000 719,485Exp (260,000) 190/160 (308,750)Depn (80,000) 190/150 (101,333)Loss on nmwc (90,417)PBT 300,000 218,985Tax (100,000) 190/160 (118,750)PAT 200,000 100,235

Working for NMWC adjustment

1/1 100,000 190/150 = 126,667

30/6 340,000 190/160 = 403,750

=> Loss = 26,667 + 63,750 = 90,417

Question 5

(a) Discuss the accounting treatment of internally and externally generated intangible assets. (5 marks)

(b) On 1 January 2011 Marmalade Ltd revalued to £500,000 a building which had cost £200,000 when acquired on 1 January 2008. The building was depreciated using straight line depreciation at a rate of 10% per annum. The useful economic life of the building remains unchanged.


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Required

Show how the building will be accounted for in the financial statements of Marmalade Ltd from 2008 to 2011. (5 marks)



Subject guide, Chapters 1, 6, 7, 8 and 9.

Britton and Jorissen (2011) Chapters 1, 12, 13, 15 and 29.


You are required to answer all parts of the questions. Indicative solutions and workings are given as follows:

(a) General definitions of internally and externally generated intangibles, illustrated with appropriate examples need to be presented. The accounting treatment for both types of assets needs to be clearly explained.

(b) Cost £200,000

Accumulated depreciation (£60,000)

Net book value at revaluation £140,000

Revaluation reserve £360, 000

Revalued asset depreciated over 5 years remaining useful economic life

Depreciation = 500,000/7 = £71,429

2008 depn = 20,000 nbv = 180,000

2009 depn = 20,000, nbv = 160,000

2010 depn = 20,000, nbv = 140,000

2011 revaln res = 360,000

depn = 71,429

nbv = 428,571

(c) Machine £2,000

payable £2,000

December 2011

Machine £2,000

Payable £2,500

P+L £500 loss

(d) sales 19,760,000

cost of sales

mined copper 200,000 * £154 = 30,800,000

closing inventory = 120,000 * £154 = (18,480,000)

Cost of sales (12,320,000)

7,440,000

Admin (312,000)

Delivery (168,000)

Net profit 6,960,000


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closing inventory = direct cost plus depletion of mine plus depreciation of equipment = £140 + 2,520,000/200,000 + 280,000/200,000 = 140 + 12.6 + 1.4 = £154

(e) The concept of true and fair within accounting needs to be discussed including discussion of definition, application in the UK, role of accounting standards and the role of the Courts.

Question 6

Either

Discuss the traditional and economic arguments for and against accounting regulation.

Or

Discuss the need for conceptual frameworks within financial reporting. Is it possible for financial statements to comply with all qualitative characteristics discussed within the conceptual framework?

Reading for the ‘either’ part of this question

Subject guide Chapter 1.


Beaver, W.H. Financial Reporting: An Accounting Revolution. (Harlow: Prentice-Hall, 1981) [ISBN 9780133161335] Chapter 7.

Approaching the ‘either’ part of this question

You need to define accounting regulation in relation to financial reporting in the UK. You need to discuss and critically assess both traditional and economic arguments (for example, as outlined by Beaver, 1981) for and against regulation. Please read as widely as possible, including the Further readings for this topic in the subject guide.


Subject guide Chapter 2.



You need to define conceptual frameworks and briefly outline the content of a typical conceptual framework. You need to define and describe the qualitative characteristics of financial reporting and give examples of these. Particularly important is a discussion of issues in fulfilling all these (e.g. relevance and reliability, prudence and matching, prudence and faithful representation, timeliness and reliability, understandability and substance over form). Please read as widely as possible, including the Further readings for this topic in the subject guide.

Question 7

Either

Define research and development and discuss the accounting concepts used to determine the accounting treatment of research and development. Compare and contrast SSAP 13 on research and development with IAS 38 on intangibles as it relates to research and development and critically assess these standards.

Or

Discuss the concept of substance over form, illustrating your answer with reference to finance and operating leases. Compare and contrast the accounting for finance and operating leases and discuss the impact that accounting for finance and operating leases differently has on financial statements.


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Reading for the ‘either’ part of this question



Approaching the ‘either’ part of this question

You need to define research and development and give appropriate examples. You need to define the key accounting concepts of prudence, matching, relevance and reliability, and discuss the application of these concepts to accounting for research and development. You need to outline the key provisions of SSAP 13 and IAS 38 in relation to research and development and compare these standards. This comparison should include both the general approach within the standards and the specific provisions of the standard. It is particularly important to provide a critical assessment of the standards and the area and you should include the advantages and limitations of each standard. Please read as widely as possible, including the Further readings for this topic in the subject guide.



Britton and Jorissen (2011) Chapters 16 and 18.


You need to define and discuss the concept of substance over form and give examples of substance over form, for example, leases, quasi subsidiaries, consignment stock, sale and repurchase agreements and debt factoring. You should explain both types of leases and identify how they are accounted for. You need to discuss the impact of the different accounting treatments on the financial statements and illustrate this with appropriate examples. You also need to discuss the impact of the different treatments on financial statements, perhaps with reference to economic consequences and accounting ratios. Please read as widely as possible, including the Further readings for this topic in the subject guide.


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Present Value TablesDiscount rates (r) %

time / 1 2 3 4 5 6 7 8 9 10Periods(n)1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.9092 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.8263 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.7514 0.961 0.924 0.888 0.855 0.823 0.792 0.763 0.735 0.708 0.6835 0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.6216 0.942 0.888 0.837 0.790 0.746 0.705 0.666 0.630 0.596 0.5647 0.933 0.871 0.813 0.760 0.711 0.665 0.623 0.583 0.547 0.5138 0.923 0.853 0.789 0.731 0.677 0.627 0.582 0.540 0.502 0.4679 0.914 0.837 0.766 0.703 0.645 0.592 0.544 0.500 0.460 0.42410 0.905 0.820 0.744 0.676 0.614 0.558 0.508 0.463 0.422 0.38611 0.896 0.804 0.722 0.650 0.585 0.527 0.475 0.429 0.388 0.35012 0.887 0.788 0.701 0.625 0.557 0.497 0.444 0.397 0.356 0.31913 0.879 0.773 0.681 0.601 0.530 0.469 0.415 0.368 0.326 0.29014 0.870 0.758 0.661 0.577 0.505 0.442 0.388 0.340 0.299 0.26315 0.861 0.743 0.642 0.555 0.481 0.417 0.362 0.315 0.275 0.239

Discount rates (r) %

time / 11 12 13 14 15 16 17 18 19 20periods(n)1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.8332 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.6943 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.5794 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.4825 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.4026 0.535 0.507 0.480 0.456 0.432 0.410 0.390 0.370 0.352 0.3357 0.482 0.452 0.425 0.400 0.376 0.354 0.333 0.314 0.296 0.2798 0.434 0.404 0.376 0.351 0.327 0.305 0.285 0.266 0.249 0.2339 0.391 0.361 0.333 0.308 0.284 0.263 0.243 0.225 0.209 0.19410 0.352 0.322 0.295 0.270 0.247 0.227 0.208 0.191 0.176 0.16211 0.317 0.287 0.261 0.237 0.215 0.195 0.178 0.162 0.148 0.13512 0.286 0.257 0.231 0.208 0.187 0.168 0.152 0.137 0.124 0.11213 0.258 0.229 0.204 0.182 0.163 0.145 0.130 0.116 0.104 0.09314 0.232 0.205 0.181 0.160 0.141 0.125 0.111 0.099 0.088 0.07815 0.209 0.183 0.160 0.140 0.123 0.108 0.095 0.084 0.074 0.065

Documents

financial reporting 2012