Answers

Diploma in International Financial Reporting (All numbers in $000 unless otherwise stated)

December 2010 Answers

Marks 1 (a) Consolidated statement of nancial position of Alpha at 30 September 2010 ASSETS Non-current assets: Property, plant and equipment (165,000 + 100,000 + (100,000 x 25%) + 2,000 (W1)) Goodwill (W2) Available for sale investment

292,000 46,200 12,000 350,200 107,100 100,000 19,000 226,100 576,300

+ 5 (W2)

Current assets: Inventories (65,000 + 37,000 + (30,000 x 25%) 2,400 (W5)) Trade receivables (35,000 + 32,000 + (32,000 x 25%) + 25,000) Cash and cash equivalents (10,000 + 7,000 + (8,000 x 25%))

+ +

Total assets EQUITY AND LIABILITIES Equity attributable to equity holders of the parent Share capital (80,000 + 27,000) Share premium (27,000 x $260) Retained earnings (W4) Non-controlling interest (W3) Total equity Non-current liabilities: Long-term borrowings (35,000 + 30,000 + (20,000 x 25%)) Contingent consideration Deferred tax (W7) Total non-current liabilities Current liabilities: Trade and other payables (30,000 + 24,000 + (20,000 x 25%)) Short-term borrowings (5,000 + 8,000 + (6,000 x 25%) + 20,000) Total current liabilities Total equity and liabilities Workings do not double count marks Working 1 Net assets table Beta: 1 October 2009 60,000 44,000 (11,000) 4,000 1,000 1,500 99,500

107,000 70,200 157,200 334,400 30,750 365,150 70,000 24,000 23,650 117,650 59,000 34,500 93,500 576,300

+ 8 (W4) 1 (W3)

2 (W7)

+ 25

Share capital Retained earnings: Per accounts of Beta Accounting policy adjustment Plant and equipment adjustment Inventory adjustment Deferred tax on fair value adjustments Net assets for the consolidation The post-acquisition prots are 9,000 (108,500 99,500).

30 September For W2 2010 60,000 56,000 (12,000) 2,000 Nil 2,500 108,500

For W4

(W6)

(W6)

2 W2 2 W4

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Marks Working 2 Goodwill on consolidation (Beta) Cost of investment: Share exchange (45,000 x 3/5 x $360) Contingent consideration Fair value of non-controlling interest at date of acquisition (15,000 x $190) Net assets at 1 October 2009 (W1) So goodwill re: Beta equals Working 3 Non-controlling interest in Beta: Fair value at date of acquisition (W2) 25% of post-acquisition prots (9,000 (W1)) 28,500 2,250 30,750 140,000 (4,000) 5,000 6,750 13,500 (1,800) (2,250) 157,200 2,000 400 (600) 1,800 1 October 2009 (11,000) 4,000 1,000 (6,000) (1,500) 30 September 2010 (12,000) 2,000 Nil (10,000) (2,500) 1 1 + 2 (W1) 1 2 (W5) 1 (W8) 8 1 2 W4 97,200 20,000 28,500 145,700 (99,500) 46,200 1 1 + 2 (W1) 5

Working 4 Retained earnings Alpha Change in fair value of contingent consideration (24,000 20,000) Reversal of nance charge on factoring of receivables Beta (75% x 9,000 (W1)) Gamma (25% x 54,000) Unrealised prots (W5) Loss on Foster investment ((3,000) (W8) + 750 (W7))

Working 5 Unrealised prots Sales to Beta (8,000 x ) Sales to Gamma (6,400 x x 25%) Related deferred tax (2,400 x 25%)

Working 6 Deferred tax on fair value adjustments:

Intangibles adjustment Plant and equipment adjustment Inventory adjustment Net deductible temporary differences Related deferred tax (25%)

1 W1 2

Working 7 Closing deferred tax balance Alpha + Beta + x Gamma On fair value adjustments (W6) On Foster investment (3,000 (W8) x 25%) On unrealised prots (W5) 27,500 (2,500) (750) (600) 23,650 50,000 (35,000) 15,000 (12,000) 3,000

Working 8 loss on other investments Alpha investments per own nancial statements Less investments in Beta and Gamma (20,000 + 15,000) Carrying value of other investments Market value of portfolio Loss on re-measurement

1 W4

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Marks 2 (a) Statement of comprehensive income of Delta for the year ended 30 September 2010 Revenue (W1) Cost of sales (W4) Gross prot Distribution costs Administrative expenses (W5) Finance costs (W7) Prot before tax Income tax expense (W8) Prot for the year Other comprehensive income (W9) $000 310,000 (244,100) 65,900 (12,000) (27,427) (5,650) 20,823 (6,000) 14,823 11,250 26,073 1 (W1) 5 (W4) 3 (W5) 1 (W7) 1 (W8) 1 (W9) 15

(b)

Statement of nancial position of Delta as at 30 September 2010 $000 ASSETS Non-current assets Property, plant and equipment (W10) Current assets Inventories (W4) Trade receivables (50,000 2,727 (W6)) Prepaid operating lease rentals (3,000 2,700) Cash and cash equivalents

188,800 39,100 47,273 300 24,800 111,473 300,273

2 (W9) 1

Total assets EQUITY AND LIABILITIES Equity Share capital Retained earnings (W11) Revaluation surplus (W9) Total equity Non-current liabilities Lease liability (W7) Deferred tax (W12) Total non-current liabilities Current liabilities Trade and other payables (W13) Customer deposit Lease liability (W7) Total current liabilities Total equity and liabilities Workings Note references refer back to the question. Do not double count marks Working 1 Revenue As shown in TB Adjustment for revenue not yet earned

154,000 27,823 11,250 193,073 37,933 11,550 49,483 35,000 5,000 17,717 57,717 300,273

1 (W11)

(W7) 1 (W12)

1 (W12) (W7) 10

315,000 (5,000) 310,000 4,000 (3,100) 900

1 1 1 W4

Working 2 Inventory adjustment Cost of relevant components (200,000 x $20) NRV of relevant components (200,000 x ($2250 $1 $6)) So adjustment to cost of sales

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Marks Working 3 Depreciation Purchased plant (90,000 x 25%) Leased plant (70,000 x 25%) Property (54,000 x 1/45) see note below 22,500 17,500 1,200 41,200 1 2 (W4)

Note: In previous years the total depreciation on the property is 10% of the depreciable amount. So the property is 45 (50 x 90%) years old. Therefore the remaining useful life of the property is 45 years Working 4 cost of sales Opening inventories Raw material purchases Closing inventories (40,000 900 (W2)) Production costs Depreciation (W3) To statement of comprehensive income Working 5 administrative expenses As per TB Operating lease rentals ( (600 + 24 x 200)) Impairment of nancial assets (W6) To statement of comprehensive income 22,000 2,700 2,727 27,427 1 1 (W6) 3 32,000 150,000 (39,100) 60,000 41,200 244,100 + 1 (W2) 2 (W3) 5

Tutorial note Alternative sensible allocations of operating expenses between cost of sales and administrative expenses will not lose marks. Working 6 impairment of nancial assets Carrying value of trade receivable Recoverable amount (8,000 x 1/(110)) So impairment Working 7 lease liability Period ended 31 March 2010 30 September 2010 31 March 2011 Bal b/f 70,000 63,000 55,650 Payment (10,000) (10,000) (10,000) Bal in period 60,000 53,000 45,650 Interest 3,000 2,650 2,283 Bal c/f 63,000 55,650 47,933 10,000 (7,273) 2,727 1 1 (W5)

The year end liability is 55,650 of which 17,717 (20,000 2,283) is current. The balance of 37,933 (55,650 17,717) is non-current. The total nance cost for the period is 5,650 (3,000 + 2,650) Working 8 tax charge This years estimate Last years underprovision Transfer to deferred tax 5,000 400 600 6,000 100,000 (85,000) 15,000 (3,750) 11,250 1 1

Working 9 other comprehensive income Market value of revalued property Previous carrying value of revalued property Gross revaluation surplus Deferred tax at 25% Net revaluation surplus

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Marks Working 10 property plant and equipment Plant and equipment per trial balance Market value of property Initial carrying value of leased plant Depreciation for the year (W3) 60,000 100,000 70,000 (41,200) 188,800 43,000 14,823 (30,000) 27,823 7,200 600 3,750 11,550 30,000 5,000 35,000 2

Working 11 retained earnings Opening balance Prot for the period Dividend Closing balance Working 12 deferred tax Opening balance Transfer for the period On property revaluation (W9) 1 1 1

Working 13 trade and other payables Trade payables Income tax liability

Numbers in $000 unless otherwise stated. 3 Transaction (a) Extract from nancial statements Statement of comprehensive income: Finance cost of 378 Statement of nancial position: Non-current liability 4,129. Other components of equity 849. Explanation and calculations Under the provisions of IAS 32 Financial instruments: presentation the loan needs to be split into its liability and equity components. The liability component is the present value of the future cash outows discounted at 9%. This is 4,125 (5,000 x 005 x $642 + 5,000 x 120 x $042). The equity element is therefore 875 (5,000 4,125). Both the above amounts are before accounting for the issue costs of 150 (5,000 x $003). These should be allocated to the liability and equity components in the ratio 4,125:875. This means that 124 (150 x 4,125/5,000) is allocated to the liability component and 26 (150 124) to the equity component. Therefore the opening liability component after allocating the issue costs is 4,001 (4,125 124) and the opening equity component is 849 (875 26) The equity component will be unchanged over the life of the instrument but the liability component will be measured at amortised cost using an effective interest rate of 945%. The nance cost for the year ended 30 September 2010 will be 378 (4,001 x 945%) and the closing liability 4,129 (4,001 + 378 5,000 x 5%). Transaction (b) Extract from nancial statements Statement of comprehensive income Administrative expenses of 776 (rental of 700 plus depreciation of 76) Finance costs of 12. Statement of nancial position Property, plant and equipment of 1,366 in non-current assets 800 in respect of rent payable and 254 in respect of the future restoration of the property in non-current liabilities. 100 in respect of rent payable in current liabilities.

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Explanation and calculations The lease of the property would be regarded as an operating lease because a 10-year lease would not be long enough to transfer the risks and rewards of ownership to Epsilon. Therefore the lease rentals will be charged as an expense in the income statement over the lease term, normally on a straight-line basis. Under the principles of SIC 15 Operating leases incentives the inducement will be recognised over the lease term, effectively as a reduced rental. Therefore the annual rental expense will be 700 (1/10(800 x 10 1,000)). This will be charged in the statement of comprehensive income in arriving at the prot for the period. Epsilon has received net cash of 200 (1,000 800) from the lessor during the year and so there will be a closing payable of 900 (700 + 200) at the year end. This will be reduced by 100 (800 700) per annum over the remaining nine year term of the lease. Therefore 100 of this payable will be a current liability and 800 (900 100) will be non-current. Tutorial note Alternatively the 900 closing payable could be taken to be 9/10 of the inducement of 1,000 that, under the principles of IAS 17, needs to be recognised over the lease term. The costs of altering the property give Epsilon access to economic benets over the remaining 9 years of the lease and should be capitalised as property, plant and equipment. Additionally, under the principles of IAS 37 Provisions, contingent liabilities and contingent assets Epsilon has an obligation to restore the property that needs to be recognised as a provision. Given the signing of the lease agreement the obligating event is the completion of the alterations. This provision should be appropriately discounted to 242 (600 x $0404) to reect the time value of money. Because the provision has been measured on a discounted basis unwinding of the discount needs to be accounted for by debiting nance costs in the statement of comprehensive income and crediting the provision in the statement of nancial position. The relevant amount for the current year is 12 (242 x 10% x 6/12). Therefore the closing provision will be 254 (242 +12). The debit entry for initial recognition of the provision is to property, plant and equipment because it represents a further cost of access to the economic benets available from the property. Therefore the total amount that will be taken to property, plant and equipment is 1,442 (1,200 + 242). This amount will be depreciated over the useful economic life of 9 years to give a charge to the income statement (as an operating cost) in the current year of 76 (1,442 x /9). The closing balance on PPE will therefore be 1,366 (1,442 76). Transaction (c) Extract from nancial statements Statement of comprehensive income Gain on sale of shares of 960 in prot and loss section. Unrealised gain of 120 on re-measurement of shares held at the year end in other comprehensive income. The previously unrealised gain of 720 realised on the sale of shares reclassied out of other comprehensive income as part of the gain on sale of shares of 960 (see above). Statement of nancial position Financial asset (probably non-current) of 1,400. Valuation surplus relating to the remaining investment of 600 as a component of equity. Explanation and calculations The shares would be regarded as nancial assets under the principles of IAS 39 Financial instruments: recognition and measurement. They would be classied as available for sale nancial assets as they are not part of a trading portfolio. Available for sale nancial assets are measured at fair value, with gains or losses on re-measurement recognised as other comprehensive income until the shares are sold. Therefore a gain of 1,200 (1,000 x ($320 $200) will have been recognised in other comprehensive income in prior periods. In the current period 720 (1,200 x 600/1,000) of this gain becomes realised when the shares are sold. IAS 39 requires that in such circumstances the realised gain is reclassied as part of the prot on sale of the shares, which will be 960 (600 ($360 $320) + 720). The unsold shares will remain in the statement of nancial position as nancial assets (probably non-current) at their fair value of 1,400 (400 x $350). A gain on re-measurement of 120 (400 x ($350 $320) will be recognised as other comprehensive income in the statement of comprehensive income for the year. The closing balance in other components of equity relating to the investment will be 600 (400 x ($350 $200)).

(a)

IAS 33 applies to entities whose ordinary shares or potential ordinary shares are traded in a public market (a potential ordinary share is a nancial instrument that gives the holder a right to acquire ordinary shares). Other entities who voluntarily disclose earnings per share (EPS) information must do so in accordance with the requirements of IAS 33. For entities that have no discontinued operations IAS 33 requires disclosure of basic and diluted EPS on the face of the statements of comprehensive income or (where separately presented) the income statement. The basic EPS of an entity is the prot attributable to the ordinary shareholders (or, in the case of a group, the ordinary shareholders of the parent) divided by the weighted average number of ordinary shares in issue in the period. The diluted EPS is a hypothetical measure of EPS that adjusts the basic EPS measure for the potential effects on earnings and number of shares for the effects of all dilutive potential ordinary shares.

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For entities that have discontinued operations IAS 33 requires disclosure of the EPS for total prots, and for prots on continuing operations, on the face of the statement of comprehensive income (or income statement, if separately presented). The EPS for discontinued operations also needs to be disclosed, but entities are permitted to make this disclosure in the notes to the nancial statements if they wish. (b) 1. 2. 3. 4. 5. 6. 7. Computation of earnings for EPS purposes 35,000 (30,000 x 6%) = 33,200. Computation of theoretical ex-rights fair value and adjustment factor (7 x $180 + 2 x $135) x 1/9 = $170. So adjustment factor is 180/170 Computation of weighted average number of shares in issue (70,000 x 3/12 x 180/170) + (90,000 x 9/12) = 86,029 Compute basic EPS 33,200/86,029 = 386 cents Compute earnings for diluted EPS 33,200 + ((23,000 x 7%) x 80%) = 34,488 Compute number for diluted EPS 86,029 + 20,000 = 106,029 Compute diluted EPS 34,488/106,029 = 325 cents

(c)

Equity settled share based payments should be recognised from the grant date. This is the date when the entity confers on the other party the right to equity instruments, dependent in some cases on vesting conditions. If there are no vesting conditions, the whole amount should be recognised immediately. If there are vesting conditions, the amount should be recognised on a systematic basis over the vesting period. The payments should be measured at fair value. In this context fair value means the fair value of the equity instruments granted in the case of transactions with employees. In the case of transactions with other parties fair value means the fair value of the goods and services received. The amount recognised in each period should be debited to the statement of comprehensive income as an operating cost (unless it qualies for inclusion in the cost of another asset, e.g. inventory). The credit entry is to equity. IFRS does not specify which component.

(d)

The cumulative amount recognised at 30 September 2010 is 500 x 200 x $120 x 2/3 = $80,000. This is shown in the statement of nancial position as part of equity. The cumulative amount recognised at 30 September 2009 is 500 x 150 x $120 x 1/3 = $30,000. So the amount recognised in the statement of comprehensive income for the year is $50,000 ($80,000 $30,000).

Marks 5 (a) 1. Computation of goodwill on acquisition Cost of investment (800,000 x 2/5 x $4) Fair value of non-controlling interest (200,000 x $14) Fair value of identiable net assets at date of acquisition So goodwill equals 1,280 280 (1,300) 260 1 1

NB: Acquisition costs are not included as part of the fair value of the consideration given under IFRS 3 2. Calculation of impairment loss Unit Before allocation 600 550 400* Carrying value Allocation 104 104 52 After allocation 704 654 452 Recoverable amount Impairment loss

A B C

740 650 400

Nil 4 52

1 1 1

* After writing down assets in the individual CGU to recoverable amount

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Marks 3. Calculation of closing goodwill Goodwill arising on acquisition (W1) Impairment loss (W2) So closing goodwill equals 4. Calculation of overall impairment loss Arising on goodwill (W3) Arising on assets in unit C (450 400) So total loss equals 260 (56) 204 56 50 106

212 (20%) of the above is allocated to the NCI with the balance allocated to the shareholders of Omega

1 11

(b)

The nancial statements of Newsub for the year ended 30 September 2010 need to be prepared under international nancial reporting standards (IFRS) that are effective at the reporting date 30 September 2010. This applies to the nancial statements for the current period as well as the comparative information. The comparative information will have been presented under local accounting standards in previous years and so it will need to be restated. Given the need to present a comparative statement of changes in equity Newsub will need to compute the equity under IFRS at 1 October 2008. Therefore Newsub will need a statement of nancial position under IFRS at that date. This is referred to in IFRS 1 First time adoption of IFRS as the opening IFRS statement of nancial position. The opening IFRS statement of nancial position will need to be prepared under IFRS that are in force on 30 September 2010, the reporting date. Subject to certain specic exemptions that are given for practical reasons, this principle needs to be applied fully retrospectively to assets and liabilities of Newsub at 1 October 2008. In the rst IFRS nancial statements IFRS 1 requires a reconciliation of amounts that were presented under local accounting standards in previous periods to the amounts presented as comparatives under IFRS in the current period. This means that there will need to be a reconciliation of: The comprehensive income for the year ended 30 September 2009. The equity at 1 October 2008 and 30 September 2009.

(c)

Since the lease is an operating lease the property will be removed from the nancial statements. A prot on sale of $15 million ($70 million $55 million) will be shown as other income in the statement of comprehensive income. The rental expense of $8 million will be shown as an operating cost in the statement of comprehensive income. The difference of $20 million between the disposal proceeds ($90 million) and the market value of the asset ($70 million) will be shown as deferred income and released to the statement of comprehensive income over the lease term of 10 years. Therefore $2 million ($20 million x 1/10) will be credited to the statement of comprehensive income in the year ended 30 September 2010, probably as a reduction in operating costs. The remaining deferred income balance of $18 million ($20 million $2 million) will be included as a liability in the statement of nancial position. $2 million of this will be a current liability and $16 million ($18 million $2 million) will be non-current.

(d)

The international nancial reporting standard that is relevant to this issue is IAS 37 Provisions, contingent liabilities and contingent assets. The amount payable to the customer of $55 million should be recognised as a provision in the statement of nancial position. The obligating event is the sale of goods under the warranty. There is a probable outow of economic benets that can be reliably estimated. The amount potentially recoverable from the manufacturer is a contingent asset which should not be recognised in the nancial statements unless the recovery is virtually certain. Where (as in this case) the recovery is probable the contingent asset should be disclosed in the notes to the nancial statements.

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Diploma in International Financial Reporting

December 2010 Marking Scheme Marks 25

Marks as annotated on model answer NB if proportional consolidation NOT used for Gamma only give a maximum of 2 of the 3 marks highlighted in bold on the answer

Marks as annotated on model answer

25

(a)

Principle liability/equity split Calculate split Correct treatment of issue costs up to Compute nance cost and say where shown Compute closing liability and say where shown Compute closing equity balance and say where shown Total

1 1 1 1 1 6 1 1 1 1 1 1 1 1 1 11 1 1 1 1 1 1 1 1 8

(b)

Correctly conclude operating lease Principle rental expense in SCI Principle of correct treatment of inducement Calculate rental expense for year Calculate accrued rental expense and split Principle capitalise costs of $1.2m Principle make provision (with explanation) Calculate unwinding of discount Unwinding of discount is nance cost and provision is non-current liability Principle capitalise future restoration costs Compute depreciation Compute closing PPE value and state non-current asset Total

(c)

Principle shares a nancial asset Correct classication as AFS Explain measurement implications including reclassication on sale Compute unrealised gain arising in prior periods Compute total gain on sale and state where shown Identify reclassied gain and describe treatment in OCI Compute additional gain on remaining shares and describe treatment Compute and describe carrying value of shares in SFP Total

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(a)

Comment on scope up to Describe calculation of basic EPS up to Describe calculation of diluted EPS up to Disclosures for entities without discontinued operations Additional disclosures for entities with discontinued operations up to Total

Marks 1 1 1 1 1 7 1 3 1 1 8 2 1 1 5 1 2 1 5

(b)

Compute earnings for basic EPS up to Compute number for basic EPS up to So compute basic EPS in cents Compute earnings for diluted EPS Compute number for diluted EPS So compute diluted EPS in cents Total

(c)

Recognition criteria up to Measurement basis up to Reporting requirements up to Total

(d)

Principle charge in SCI is difference between closing and opening amounts in SFP Compute closing amount ( per element) Compute opening amount ( for $120, for 150, for 1/3) Calculate amount in SCI Total

(a) (b)

Marks as annotated on model answer All amounts need to be measured using IFRS in force at reporting date Principle of opening IFRS SFP with identied date up to Appreciate application fully retrospectively with principle of exceptions Explain reconciliations needed Total

11 1 2 1 1 6 1 1 1 1 5 1 1 3

(c)

Principle de-recognise property Compute correct prot on sale and discuss treatment $8 million shown as rental expense Principle $20 million is deferred income in SFP Split into current and non-current amounts Total

(d)

Explanation of provision Explanation of contingent asset Total

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