P1 - Corporate Reporting August 10

8/6/2019 P1 - Corporate Reporting August 10

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CORPORATE REPORTING

PROFESSIONAL 1 EXAMINATION - AUGUST 2010

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

PRO-FORMA STATEMENT OF COMPREHENSIVE INCOME BY NATURE,STATEMENT OF COMPREHENSIVE INCOME BY FUNCTION

AND STATEMENT OF FINANCIAL POSITION ARE PROVIDED.

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

INSTRUCTIONS:During the reading time you may write notes on the examination paper but you may not commencewriting 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 skillsand care must be taken regarding the format and literacy of the solutions. The marking system will takeinto account the content of the candidates' answers and the extent to which answers are supported withrelevant 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.


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THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND

CORPORATE REPORTINGPROFESSIONAL 1 EXAMINATION AUGUST 2010

Time allowed 3.5 hours, plus 10 minutes to read the paper.You are required to answer Questions 1, 2 and 3. You are also required to answer either Question 4 or 5.(If you provide answers to both Questions 4 and 5, you must draw a clearly distinguishable line through theanswer not to be marked. Otherwise, only the first answer to hand for Questions 4 or 5 will be marked.)

You are required to answer Questions 1, 2 and 3.

1. Clock PLC prepares its financial statements to 30 June each year. On 1 July 2008, Clock PLC purchased 75%of the issued share capital of Mouse Ltd by issuing two shares in Clock PLC for every four shares in Mouse Ltd.The market value of Clock PLCs shares at 1 July 2008 was 4 per share. At the date of acquisition, Mouse Ltdhad 10 million 1 ordinary shares and retained earnings of 9 million.

On 1 January 2009, Clock PLC acquired 30% of the shares of Tick Ltd for 3 each. Tick Ltds issued share capitalat 1 January 2009 was 4 million 1 ordinary shares.

The draft Statements of Comprehensive Income for the three companies for the year ended 30 June 2009 are asfollows:

Clock PLC Mouse Ltd Tick Ltd 000s 000s 000s

Revenue 32,600 18,200 6,000Cost of sales (18,400) (11,400) (2,800)Gross profit 14,200 6,800 3,200Other income 3,100 1,800 200Operating expenses (6,400) (2,100) (1,400)

Operating profit 10,900 6,500 2,000Interest payable and similar charges (1,800) (1,400) (600)Profit on ordinary activities 9,100 5,100 1,400Taxation (2,100) (1,800) (300)Profit on ordinary activities after taxation 7,000 3,300 1,100

The following information is relevant:1. The fair value of the net assets of Mouse Ltd at the date of acquisition was equal to their carrying value

with the exception of land. The land had a fair value of 1m below its carrying value and this has notchanged since the date of acquisition.

2. At 30 June 2009, the fair value of Mouse Ltds specialist plant and equipment was 600,000 in excess ofits carrying value. The remaining useful life of these assets is four years and Mouse Ltd has not reflectedthis fair value in its financial statements.

3. Sales by Clock PLC to Mouse Ltd, in the year to 30 June 2009, amounted to 3.2 million. Clock PLC madea profit of cost plus a third on all sales. Mouse Ltds year-end inventory includes 1.2 million in relation topurchases from Clock PLC.

4. Included in Mouse Ltds operating expenses is an amount of 500,000 in respect of management chargesinvoiced and included in revenue by Clock PLC.

5. Clock PLCs policy is to value the non-controlling interest at fair value at the date of acquisition. At the date

of acquisition, the goodwill attributable to the non-controlling interest was 200,000.6. All profits and losses are deemed to accrue evenly throughout the year.

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REQUIREMENTS:

(a) Calculate the goodwill arising on the acquisition of Mouse Ltd. (4 marks)

(b) Prepare a consolidated Statement of Comprehensive Income for the Clock group for the year ended 30 June 2009.(19 marks)

Presentation (1 mark )

(c) IAS28, Investments in Associates , deals with the accounting treatment of associated entities.

Explain the meaning of the following terms:

(i) Significant influence. (3 marks)

(ii) Equity method of accounting. (3 marks)

[Total: 30 marks]

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REQUIREMENTS:

(a) Prepare a consolidated statement of cash flows in accordance with IAS 7 Statement of Cash Flows for the yearended 31 December 2009.

(21 marks)Presentation (1 mark)

(b) The Managing Director of Splash PLC has asked you to draft a memorandum, briefly explaining the following:

(i) Why it is important to remove unrealised profits arising from transactions between companies in a group?(3 marks)

(ii) Whether it is possible for a business to make losses year after year but still increase its bank balance?(3 marks)

(iii) The difference between the direct method and indirect methods of calculating the net cash flow fromoperating activities.

(2 marks)[Total: 30 Marks]

3. The following multiple choice question contains eight sections, each of which is followed by a choice ofanswers. Only one of each set of answers is strictly correct.

REQUIREMENTS:Give your answer to each section in the answer sheet provided. [Total: 20 Marks]

1. At what amount does IAS 17 Leases require a leasee to capitalise a finance lease?

(a) The assets fair value.(b) The cash price of the asset.(c) The minimum lease payments less the residual value of the asset.(d) The lower of the assets fair value and the present value of the minimum lease payments.

2. Margo Ltd purchased a specialist piece of equipment on 1 March 2003 for 800,000. The equipment has a usefullife of 8 years with an expected residual value of 220,000. On 1 March 2007, the equipment was revalued to itsfair value of 650,000 with no revision to its remaining useful life. On 1 March 2008 the equipment was sold for

750,000.

In accordance with IAS 16 Property, Plant and Equipment, what was the profit on disposal to be included in MargoLtds statement of comprehensive income for the year ended 28 February 2009?

(a) 240,000(b) 262,500(c) 207,500(d) 100,000

3. The records of Helen PLC for the year ended 31 December 2009 are as follows:

Property, plant and equipment at 31 December 2008 622,000Sale proceeds 106,000Profit on sale of property, plant and equipment 19,000Depreciation charged on property, plant and equipment 210,000Property, plant and equipment at 31 December 2009 540,000

In accordance with IAS 7 Statement of Cash Flows , what amount for purchase of property, plant and equipmentwould be included in the statement of cash flows for the year ended 31 December 2009?

(a) 147,000(b) 234,000(c) 215,000(d) 98,000


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4. According to IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, which of the following wouldqualify as a change in accounting estimate?

(i) Provision for obsolescence of inventory(ii) Correction necessitated by a material error(iii) A change as a result of adoption of a new International Accounting Standard(iv) A change in the useful life of a non-current asset.

(a) All the above

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

5. During the current accounting period Ryan PLC incurred the following costs:

(i) 8,000 legal costs in connection with registering a patent(ii) 14,000 on commissioning a research report on future product designiii) 80,000 on acquiring a brand name(iv) 60,000 on developing a brand internally

Under IAS 38 Intangible Assets what amount can be recognised as intangible assets?

(a) 148,000(b) 154,000(c) 88,000(d) 82,000

6. Block Ltd is a large construction company based in Cork. Details of a two year government building contract, atthe year ended 31 January 2010, are as follows:

000sFinal contract price 3,000Cost of work completed to date 1,400Value of work certified to date 1,200Progress payments invoiced and received to date 1,000Estimated cost to completion 800

It is company policy that profit is to be recognised by Block Ltd, on its contracts in accordance with IAS11Construction Contracts using the value of work certified (as a percentage of contract value) to estimate thepercentage completion of each contract.

How much profit should be recognised in the statement of comprehensive income in relation to the above contractfor the year ended 31 January 2010?

(a) 480,000(b) 190,000

(c) 800,000(d) 320,000

7. Texet PLC has commissioned a new piece of equipment to be constructed at a cost of 640,000. It is expectedthat the work will commence on 1 October 2010 and be completed by the year ended 31 May 2011. The cost willbe met from the companys existing borrowings which are as follows:

Loan A of 500,000 with an interest rate of 6%Loan B of 900,000 with an interest rate of 4%Loan C of 600,000 with an interest rate of 8%

Calculate the amount of borrowing costs that Texet PLC can capitalise, for the year ended 31 May 2011, as perIAS 23 Borrowing Costs

(a) 38,400(b) 36,480(c) 30,400(d) 24,320

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8. Nectar PLC has a balance of 800,000 on its retained earnings at 1 July 2009. During the year ended 30 June2010 the company:

Revalued property with a cost of 2 million and accumulated depreciation of 1.2 million, to 2.5 million. Noannual transfers between reserves are to be made.

Issued shares at a premium of 100,000 Made a profit for the year of 500,000

In addition, an interim dividend of 300,000 was paid during the year ended 30 June 2010.

In accordance with IAS1, (revised) Presentation of Financial Statements, what is the closing balance on retainedearnings in Nectar PLCs statement of changes in equity for the year ended 30 June 2010?

(a) 1,400,000(b) 1,700,000(c) 1,300,000(d) 1,000,000

Answer either question 4 or 5

4. IAS16 Property, Plant and Equipment and IAS40 Investment Property outlines the accounting treatment of tangiblenon-current assets.

Hegarty PLC is a Limerick based computer manufacturer and during the year ended 31 October 2009 the followingtransactions in relation to property, plant and equipment took place.

1. On 1 April 2009, a new machine was purchased by Hegarty PLC in order to improve productivity. The cost of themachine was 600,000, but the company also incurred the following:

Delivery costs 4,000Labour installation costs (Note i) 15,000Management and supervision costs (allocated from head office) 10,000Material costs used for the installation -inclusive of 223 recoverable VAT. 1,500Cost of testing of new machine (Note ii) 3,000Maintenance service contract costs per annum 400Proceeds from sale of by-products produced as a result of the testing process (100)

Notes:

(i) These were 20% higher than budgeted due to an industrial dispute at the time of installation.

(ii) Included in the testing costs of the machine was 150 in connection with a quarterly diagnostic check ofmachinery.

Plant and equipment are depreciated at 25% straight line. The cost of plant and equipment at 1 November 2008amounted to 300,000 and the accumulated depreciation was 180,000 at that date.

2. Hegarty PLCs head office building was originally acquired on 1 November 2003 for 2m, and is depreciated at4% per annum straight line. On 1 November 2007, it was revalued to 2.5m. Due to the recent downturn incommercial property prices, valuers acting for the company have advised that the valuation on 31 October 2009should be 2m.

3. On 1 November 2008, Hegarty PLC purchased a property in Ennis, Co. Clare costing 500,000 for its investmentpotential. The amount attributable to land was negligible, and the buildings are expected to have a useful life of 40years. Local property indices indicate that property prices in this area have gone against the downward national

trend, and that the fair value of the property has increased during the year to 31 October 2009.


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REQUIREMENTS:

(a) In relation to the machinery and head office building, draft the non-current asset note showing the movements onproperty, plant and equipment for the year to 31 October 2009.

(12 marks)(b) Define the term Investment Property and explain why it may not be appropriate to charge depreciation in relation

to such a property.(4 marks)

(c) Assuming that Hegarty PLC adopts a fair value policy for the property in Ennis, explain how the property would bepresented in the financial statements for the year to 31 October 2009, if the property has risen in value by 5%during the year. (Disclosure notes are not required).

(4 marks)[Total: 20 marks]

OR5. IAS37 and IAS10 provides guidance on the accounting treatment of Provisions, Contingent Liabilities and

Contingent Assets and Events After the Reporting Period .

(a) In accordance with IAS37 Provisions, Contingent Liabilities and Contingent Assets , define a contingent asset andexplain how they should be treated in the financial statements.

(4 marks)

(b) In accordance with IAS10 Events After the Reporting Period , distinguish between an adjusting event and a non-adjusting event.

(4 marks)

(c) You have been approached by the Financial Controller of Severn PLC. You have been asked to provide someadvice in relation to the companys draft financial statements for the year ended 31 March 2010. You should assumethat the Directors had agreed to sign the companys financial statements on 2 June 2010.

1. At a board meeting of Severn PLC in March 2010, a decision was taken in principle to dispose of a subsidiarycompany, Trent Ltd. This investment was valued in the statement of financial position of Severn PLC, at 31March 2010, at 1,500,000. On 25 April, the management of Trent Ltd decided to buy the company for 2,200,000.

2. Five hundred customers are bringing an action against Severn PLC for the supply of faulty goods. SevernPLCs solicitors have confirmed that in their opinion, 20% of the claims are defendable at no cost. Theaverage level of damages per successful claim is estimated at 2,000. A similar provision, amounting to 600,000 was in place at 31 March 2009, and was disclosed in the statement of financial position at thatdate. 400,000 was paid out for such claims during the year ended 31 March 2010.

3. On 28 April 2010, 150,000 was paid to John Waldon as compensation for his removal as HR Director. Mr.Waldon had been dismissed by a majority vote at a board meeting in March 2010. The reasons for hisdismissal were in relation to professional misconduct.

4. Severn PLC has renewed the unlimited guarantee given in respect of the bank overdraft of a company inwhich it holds significant investment. The companys overdraft amounted to 450,000 at 31 March 2010 andit has net assets of 1.5 million.

5. Materials used in the production of one of the companys key products were included in year-end inventoryat a cost of 105,000. In May 2010, the auditors indicated that the materials could have been purchasedfor 60,000 in April 2010, due to a fall in world commodity prices.

REQUIREMENTS:

You are required to prepare a memorandum to the Board of Directors of Severn PLC in which you explain how each ofthe above items should be reflected in the companys financial statements for the year ended 31 March 2010.(You may assume that each of the items is material). (12 marks)

[Total: 20 marks]END OF PAPER


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THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND

CORPORATE REPORTINGPROFESSIONAL 1 EXAMINATION AUGUST 2010

SOLUTION 1

(a) 000s

Consideration10m * 75% * 2/4 * 4 15,000LessShares 10,000Retained earnings 9,000Fair value adjustment (1,000)

18,000 * 75% 13,500Goodwill attributable to parent 1,500Goodwill attributable to non controlling interest 200

Full goodwill 1,700

(4 marks)

(b)Clock group

Consolidated statement of comprehensive income for the year ended 30 June 2009 000s

Revenue W1 47,100Cost of sales W2 (26,900)Gross profit 20,200Other income 3,100+1,800 4,900Operating expenses W3 (8,000)Operating profit 17,100Income from associates W4 165Interest payable and similar charges 1,800+1,400 (3,200)Profit on ordinary activities before taxation 14,065Taxation 2,100+1,800 (3,900)

Profit for the period 10,165Other Comprehensive IncomeRevaluation gain 600Total Comprehensive Income 10,765

Attributable to:Owners of the parent 9,340Non controlling interest W5 825

10,165

Attributable to:Owners of the parent 9,790Non controlling interest W6 975

10,765

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SUGGESTED SOLUTIONS


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W1 000sRevenueClock 32,600Mouse 18,200

50,800Less management charges (500)Less intra group sales (3,200)

47,100

W2 000sCost of salesClock 18,400Mouse 11,400Less:Intra group sales (3,200)Plus:URP on inventories (1.2m/133.3*33.3) 300

26,900

W3 000s

Operating expensesClock 6,400Mouse 2,100Less management charges (500)

8,000

W4 000sIncome from associatesProfit after taxation 1,100 * 6/12 * 30% 165

W5 000sNon controlling interestProfit 3,3003,300*25% 825

W6 000sNon controlling interest Profit (w5) 825NCI in subsidiarys otherComprehensive income (600*25%) 150

975

(19 marks)Presentation 1 mark

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(c) Defined as power to participate in the financial and operating policy decisions of investee but not controlover these policies.

Significant influence is highlighted in IAS28 as a situation where the investor holds, directly or indirectlythrough subsidiaries, 20% or more of the voting power of the investee and that if such a situation existssignificant influence will be presumed.

Significant influence can be evidenced by:o Representation on the board of directors or equivalent,o Participation in policy making processeso Material transactions between investor and investeeo Provision of essential technical information

Equity accounting is a method of accounting that brings an associate investment into the parentcompanys financial statements initially at cost. The carrying amount of the investment is then adjustedin each period for the group share of profit of the associate.The investment is calculated at:

Cost of investment

Add group share of post acquisition retained profit. Less any impairment losses.IAS28 does not allow the use of proportionate consolidation of associates.


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SOLUTION 2

Consolidated Statement of cash flows for the year ended 31 December 2009

000 000Cash flows from operating activities

Cash generated from operations 2,222Interest paid (100)Income tax paid (w1) (347)

Net cash from operating activities 1,775

Cash flows from investing activitiesPurchase of property plant and equipment (w2) (3,002)Acquisition of subsidiary Muck ltd net of cash acquired (w7) (177.5)Dividends received from associates (w6) 220Proceeds from sale of property plant and equipment 680

Net cash used in investing activities (2,279.5)

Cash flows from financing activitiesLoan 800

Dividends paid to Non controlling interest (w8) (326.5)Dividends paid (w5) (14)Net cash used in financing activities 459.5Net increase in cash and cash equivalents (45)Cash and cash equivalents at beginning of period 85Cash and cash equivalents at end of period 40

Note: Reconciliation of profit before tax to cash generated from operationsProfit before tax 1,350Finance cost 100Depreciation charge 782Amortisation charge (w3) 80

Loss on disposal of property plant and equipment 120Share of profits from associates (240)Decrease in inventories (740-610-150) 20Decrease in trade and other receivables (390-350-85) 45Decrease in trade and other payables (520-480-75) (35)Cash generated from operations 2,222

W1Income Tax

000 000Cash 347 Bal b/d 210

Bal c/d 455 Income statement 482Acquisition taxation 110

802 802

W2PPE

000 000Bal b/d 2,610 Disposals 800Acquisition of sub (610+90) 700Cash 3,002 Income statement: depreciation 782

Bal c/f 4,7306,312

6,312

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W3Intangibles

000 000Bal b/d 310 IS amortised 80Acquisition 120 Bal c/f 350

430 430

W4Share capital and premium

000 000Bal b/d (1,000 +200) 1,200

Bal c/d (1,400+300) 1,700 Acquisition of Muck Ltd 5001,700 1,700

W5Retained earnings 000 000

Dividends paid 14 Bal b/d 865Bal c/d 1,615 IS 764

1,629 1,629

W6Investments in Associates

000 000Bal b/d 500 Cash 220IS 240 Bal c/f 520

740 740

W7Acquisition of subsidiaryPPE (610+90) 700Inventories 150

Trade receivables 85Cash and cash equivalents 20Trade payables (75)Taxation (110)Non controlling interest (192.50)

577.50Goodwill 120

697.50Less: cash and cash eq. (20)Non cash consideration (400 * 1.25) (500)Cash flow on acquisition: net of cash acquired 177.50

500,000+197,500 = 697,500680,000+90,000=770,000*.75 = 577,500Goodwill 120,000

W8Non-controlling interest

000 000Cash 326.50 Bal b/d 610

Acquisition of subsidiary (865-185+90)*25% 192.50Bal c/d 580 IS 104

906.50 906.50

(21 marks)Presentation (1 mark)

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(b)To:From:Date:

Re:

(i) On consolidation of the accounts of H and S, it should be recognised that a sale from H to S couldnt give riseto a profit as far as the group income statement is concerned, as the sale is in effect an internal group transfer.In order for the group to realise a profit on sale, the sale must be made to a customer outside the group.

If at the end of the year, S has bought from goods from H at cost plus and the goods have not been soldoutside the group by S. Then, as far as the group is concerned, the profit made by H has not been realised,since it is still in the inventory of S. Both the group profit and inventory will be overstated and will requireadjusting as follows:

Reduce the group profit by the amount of unrealised profit Reduce the group inventory by the amount of unrealised profit.

If subsidiary sells goods to H, the principle is exactly the same, unrealised profit will have to be eliminated,but this time there will be a non-controlling interest to be accounted for.

Reduce group profit by majority share Reduce non-controlling interest Reduce group inventory Same principles hold true for transfer of non-current assets. (3 marks)

(ii) Other things being equal, in the longer term profits do have the effect of increasing the bank balance. However,in the short term, the making of profit will not necessarily result in an increased bank balance. Profit and anincrease in cash/bank are not the same.

The reason why profit does not necessarily result in an increase in cash is due to the fact that profit isdetermined by comparing income and expenditure and not receipts and payments (i.e. accruals/matchingprinciple).

Likewise, losses do not necessarily result in a decrease in bank balances. Purchase of inventory on creditwill increase cost of sales but there will be no outflow of cash. Depreciation and amortisation will decreaseprofits but they will not affect cash/bank. Closing inventory may fall, which although increasing cost of sales,it would imply inventory has been sold, so increasing cash. Also, could discuss the effect of losses on saleof non-current assets.

(3 marks)

(iii) Indirect method involves starting with the operating profit and adjusting it for non-cash charges and credits

so that one figure of operating cash flows is shown. In essence, the indirect method, starts from operatingprofit, and adjusts for movements in working capital and non cash items such as depreciation.

The direct method involves showing the individual operating cash receipts from customers and cash paymentsto suppliers and employees. To use the latter method, cash receipts from customers and cash payments tosuppliers and other cash payments will have to be calculated. The direct method is easiest to understandbecause it deals with the natural cycle of cash flows.

The reason most companies use the indirect method is because cash flow statement is prepared from theexisting statement of comprehensive income and statement of financial position. Additionally, the directmethod requires more work to analyse the constituent cash flows.


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SOLUTION 3

1. (d)

2. (c)Revalued on 1 March 2007 650,000Accumulated depreciation at 28 February 2007650,000-220,000 / 4 years remaining life 107,500Carrying value at 1 March 2008 542,500Sale proceeds 750,000Profit on disposal 207,500

3. (c)Balance brought forward 622,000Less depreciation 210,000Less disposals (106,000 19,000) = WDV 87,000

325,000closing balance 540,000Therefore purchases 215,000

4. (d)

5. (c) 8,000+ 80,000 = 88,000

6. (d)000s

Final contract price 3,000Costs to date 1,400Costs to complete 800 2,200Expected profit 800

Work certified 1,200 * 100 = 40% completeContract value 3,000

Profit recognised 800* 40% = 320

7. (d)(500,000* .06) + (900,000* .04) + (600,000 *.08) *100 = 5.7%500,000+900,000+600,000

640,000 * .057 * 8/12 = 24,320

8. (d)Balance 1/1/2009 800,000Profit 2009 500,000

1,300,000Less dividends 300,000

1,000,000

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SOLUTION 4(a)

Head Office Plant & equipment Total 000 000 000

Cost/valuationAt 1 November 2008 2,500 300 2,800Additions (w1) 620.53 620.53Revaluation (500) (500)At 31 October 2009 2,000 920.53 2,920.53

DepreciationAt 1 November 2008 100 180 280Charge for year 100 165.494 265.494Revaluation (200) - (200)At 31 October 2009 - 345.494 345.494

Carrying amountAt 31 October 2008 2,400 120 2,520

At 31 October 2009 2,000 575.036 2,575.036

W1

Additions to plant and equipment

000External costs 600Delivery costs 4Labour costs (15 x 100/120) 12.5Materials (1.5 0.223) 1.28

Testing (3 0.15) 2.85Sale of by-products (0.1)

620.53

Depreciation 7/12 X 25% X 620.53 = 90,49425% X 300,000 = 75,000

165,494

W2

Head office revaluation

000Original cost 1 Nov 2003 2,000Depreciation 4 years @ 4% (320)Carrying value at 1 November 2007 1,680Revaluation gain 820Revalued amount 1 November 2007 2,500Depreciation (4% for 2 years) (200)Balance 1 November 2009 2,300Revaluation loss (2,300 2,000) (300)Carrying value 31 October 2009 2,000

(12 marks)

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(b) Investment property consists of land or buildings held to earn rentals or held for capital appreciation (or both)rather than held:

(i) for use in the production or supply of goods or services, or(ii) for administrative purposes, or(iii) for sale in the ordinary course of business.

The purpose of depreciation is to spread the cost of an asset over its useful life as it is consumed in an entity'soperations. But property which is acquired as an investment rather than for use is not consumed in this wayand does not have a useful life. In consequence, the charging of depreciation is not appropriate for investmentproperty.

(4 marks)

(c) On 1 November 2008, the building has a carrying amount of 500,000 and should be recognised as aninvestment property.

The property should be revalued to the fair value, at 31 October 2009, amounting to ( 525,000 - 500,000)= 25,000 increase.

Gain/loss should be taken directly to the statement of comprehensive income. It is not shown under

revaluation reserve/ other comprehensive income. (4 marks)[Total: 20 Marks]

SOLUTION 5

(a) A contingent asset is defined as a possible asset that arises from past events and whose existence will beconfirmed only on the occurrence or non occurrence of one or more uncertain future events not wholly withinthe control of the entity.

An example of such an asset may arise if the entity is involved in a legal case and will receive damages if the

case is won. IAS37 requires that contingent assets should not be recognised in the statement of financialposition.

However, they should be disclosed in the notes, if the inflow of economic benefits is judged to be probable.(4 marks)

(b) Adjusting events: - those that provide evidence of conditions that existed at the end of the reporting periode.g. sales of inventories held at the reporting date.

Non-adjusting events: - those that are indicative of conditions which arose after the reporting period e.g.announcement of a major restructuring programme

( 4 marks)

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(c)

To:From:Date:

Re:

(i)

1. The decision in principle was taken to sell Trent Ltd before the year end. The asset should be classified asheld for resale if it is made available for immediate sale, management are actively marketing the asset andit is expected the sale will be completed within 12 months. The investment should be included at the lowerof cost, 1,500,000 and the fair value of 2,200,000. A justification could be made to treat this as adiscontinued operation.

2. Provision re faulty goods: 0.80 x 2,000 x 500 = 800,000

Provision reFaulty goods

000At 1 July 2008 600

Utilised in year (400)SCI charge (bal figure) 600At 31 June 2009 800

3. John Waldons dismissal took effect before the year end. As a consequence, the compensation of 150,000will be an adjusting event and will be charged in the financial statements for the year end 30 June 2009.

4. There should be a note under Contingent Liabilities:

Severn plc has guaranteed the overdraft in respect of a company in which it holds a significant investment.

It is not considered likely that the guarantee will be called upon. That companys overdraft was 450,000 at30 June 2009.

5. At the statement of financial position date, the value of inventory will be the lower of cost or net realisablevalue. The market price fall occurred after the statement of financial position date and thus is non adjustingevent. If the fall in market price results in the finished product sale price being reduced, there will be a casefor NRV to be re-evaluated under IAS2.

(12 marks)

[Total: 20 marks]

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Documents

P1 - Corporate Reporting August 10