Diploma in

International Financial
Reporting
MONDAY 13 DECEMBER 2004

QUESTION PAPER
Time allowed 3 hours
This paper is divided into two sections
Section A

This ONE question is compulsory and MUST be

answered

Section B

THREE questions ONLY to be answered

Do not open this paper until instructed by the supervisor

This question paper must not be removed from the examination
hall

The Association of Chartered Certified Accountants

Section A This ONE question is compulsory and MUST be attempted

1

Alpha has investments in two other entities, Beta and Gamma. Balance sheets of the three entities at 30 September
2004, their year end date, were as follows:
Alpha
$000
$000
Assets
Non-current assets:
Property, plant and equipment (Note 3)
Financial assets (Notes 1 and 2)

35,800
29,200

Beta
$000
$000

25,000
nil

65,000

Current assets:
Inventories (Notes 3 and 4)
Trade and other receivables (Notes 3 and 5)

18,000
15,000

Equity and Liabilities

Capital and reserves:
Issued capital ($1 shares)
Accumulated profits

12,000
10,000

35,000
24,000

23,300
4,000
1,500

1,000
9,000
4,000
Nil

17,000

98,000

Total equity and liabilities

10,000
13,300

nil
1,000

12,000
5,000
Nil

20,000

40,000

33,000

22,000
Current liabilities
Trade and other payables (Note 5)
Bank overdraft
Provisions

11,000
9,000

25,000
8,000

20,000
2,000

20,000

22,000

47,000

59,000
Non-current liabilities
Interest bearing borrowings
Deferred tax

20,000
nil

25,000

33,000

98,000

Total assets

Gamma
$000
$000

5,500
7,000
3,000
1,200

13,000

47,000

11,200

40,000

Notes to the balance sheets

Note 1
On 1 October 2001, Alpha purchased 15 million $1 ordinary shares in Beta for $229 million. The balance of
accumulated profits of Beta on 1 October 2001 (as shown in the financial statements of Beta) was $3 million.
Note 2
On 1 October 2002 Alpha purchased three million $1 shares in Gamma for $63 million. The balance of accumulated
profits of Gamma on 1 October 2002 was $6 million. All the remaining shares in Gamma are held by a large number
of investors, with no single investor holding a significant number of shares.
Note 3
Following the acquisitions of Beta and Gamma the directors of Alpha carried out a fair value exercise as required by
IAS 22 Business Combinations. They concluded that no fair value adjustments were necessary in respect of the
acquisition of Gamma on 1 October 2002 but the following fair value adjustments were necessary to record the
acquisition of Beta on 1 October 2001:

Description of item

Property
Plant and equipment
Inventory
Trade and other receivables

Relevant carrying amount

1 October 2001
Book value Fair value
$000
$000
12,000
14,000
8,000
8,800
9,000
9,500
8,000
8,200

Comment

Any adjustment to depreciation is immaterial

Useful economic life four years from 1 October 2001
All inventory sold shortly after 1 October 2001
Difference relates to an outstanding insurance claim
that was settled shortly after 1 October 2001 by the
receipt of $200,000.

Note 4
Alpha supplies a component that is used by the other two entities in their production processes. Alpha marks up its
production cost by 25% when computing the sales price. On 30 September 2004 the inventories of Beta and Gamma
contained the following amounts (at cost to the purchasing entity) in respect of components purchased from Alpha:

Beta $800,000.
Gamma $750,000.

Note 5
At 30 September 2004 the trade receivables of Alpha included the following amounts in respect of the sale of
components to Beta and Gamma:

Receivable from Beta $600,000.

Receivable from Gamma $500,000.

The same amounts were included in the trade payables of Beta and Gamma at 30 September 2004. There was no
other trading between the three entities.
Note 6
All shares in Beta and Gamma are ordinary shares and carry one vote in general meetings.
The policy of Alpha is to amortise purchased goodwill over a five year period. Alpha has not adopted IFRS 3
Business Combinations in its financial statements for the year ended 30 September 2004.
Required:
(a) Prepare the consolidated balance sheet of Alpha at 30 September 2004.

(21 marks)

(b) Explain, without any additional calculations, how your answer to part (a) would have been affected if Alpha
had the power to appoint a majority of the board of directors of Gamma.
(4 marks)
(25 marks)

[P.T.O.

Section B THREE questions ONLY to be attempted

2

Delta is an entity that prepares its financial statements to 30 September each year. The financial statements for the
year ended 30 September 2004 are being prepared and you are provided with the following trial balance at that date.
$000
Revenue (Note 1)
Production costs
Distribution costs
Administrative expenses (Note 2)
Suspense account (Note 1)
Inventories at 30 September 2003 (Note 3)
Interest paid and payable on interest bearing borrowings
Income tax (Note 4)
Dividends paid on equity shares
Property, plant and equipment at cost (Notes 5 and 6)
Accumulated depreciation on property, plant and equipment at
30 September 2003 (Notes 5 and 6)
Trade receivables
Bank balances
Trade payables
Provisions (Note 2)
Long term interest bearing borrowings
Lease rentals (Note 7)
Deferred tax (Notes 4 and 6)
Issued equity capital
Accumulated profits

$000
128,000

75,000
8,000
22,000
13,000
18,200
3,000
200
2,000
57,000
10,790
44,000
33,790
12,000
10,000
40,000
8,000

283,990

6,000
50,000
27,000

283,990

Notes to the Trial Balance

Note 1 Revenue and suspense account
The balance in the suspense account is made up of two related amounts:

$5 million paid by the company on 1 October 2003 for a licence to export one of its products to an overseas
entity. The licence is required by the authorities in the jurisdiction in which the overseas entity is based and
allows Delta to export this product for 10 years.
$8 million being the present value at 1 October 2003 of the expected future net income from the exports secured
by the licence. This amount was credited to revenue on 1 October 2003.

Apart from the $8 million already mentioned, revenue represents the amounts receivable in respect of goods and
services supplied during the accounting period.
Note 2 Administrative expenses
Administrative expenses includes a provision of $10 million for the possible costs of a legal claim lodged against Delta
by one of its customers before 30 September 2004. The directors of Delta consider that it is probable that Delta can
successfully defend the case but they are providing for the worst possible outcome on the grounds of prudence. The
provision of $10 million is for the amount sought by the customer ($96 million) plus the directors best estimate of
the legal costs incurred in defending the case. If Delta successfully defends the case then based on the outcomes of
similar cases in the past it is likely (but not certain) that the customer will be required to reimburse Delta for its legal
costs.
Note 3 Inventories at 30 September 2004
The carrying value of inventories at 30 September 2004 was $23 million. This figure was computed in accordance
with the principles of IAS 2 Inventories.

Note 4 Tax
The estimated income tax on the profits for the year to 30 September 2004 is $25 million.
During the year $22 million was paid in full and final settlement of income tax on the profits for the year ended
30 September 2003. The balance sheet at 30 September 2003 had included $24 million in respect of this
liability.
A transfer of $1,400,000 is required to increase the deferred tax liability in the balance sheet. $900,000 of this
amount was necessary as a result of the taxable temporary difference caused by the property revaluation (see
note 6 below)
Note 5 Property, plant and equipment
Details are as follows:
Property
Land
$000
Cost at 30 September 2004
12,000

Estimate of useful economic life (at date of purchase) Infinite

Accumulated depreciation at 30 September 2003
0

Plant and
equipment
Buildings
$000
18,000

50 years
3,240

$000
27,000

4 years
7,550

Depreciation of property, plant and equipment is allocated as follows:

80% to cost of sales.

10% to distribution costs.
10% to administrative expenses.

None of the non-current assets were fully depreciated at 30 September 2003. The above allocation excludes any
depreciation charged on the leased asset (see note 7 below) which should be fully charged to cost of sales.
Note 6 Revaluation
Since the purchase of its property on 1 October 1994 Delta has always followed the benchmark treatment laid down
in IAS 16 and carried the property at depreciated historical cost. However on 1 October 2003 the directors of Delta
decided to revalue the property to its market value of $40 million, including $195 million for the land. The original
estimate of the useful economic life of the property was still considered valid. The directors wish to make an annual
transfer of excess depreciation from the revaluation reserve to realised profits following the revaluation.
Note 7 Lease rentals
On 1 October 2003 Delta began to lease a group of machines that were used in the production process. The lease
was for five years and the total annual rental (payable in arrears) was $8 million. The lessor paid $30 million for the
machines on 30 September 2003. The lessor has advised Delta that the lease is a finance lease and that the rate of
interest implicit in the lease can be taken as 10%.
Note 8 Share issue
On 1 November 2004 Delta issued a further 10 million ordinary shares for $40 million. The shares have no par value
and the share issue has not been reflected in the trial balance that appears above.
Required:
(a) Prepare the income statement for Delta for the year ended 30 September 2004.

(11 marks)

(b) Prepare the statement of changes in equity for Delta for the year ended 30 September 2004.

(6 marks)

(c) Prepare the balance sheet for Delta as at 30 September 2004.

(8 marks)

Notes to the income statement and balance sheet are not required. However, your workings should justify your
treatment of items referred to in the trial balance and the notes with appropriate references to International
Financial Reporting Standards.
(25 marks)

[P.T.O.

Eptilon is listed in a jurisdiction that allows entities to file financial statements that are prepared under either local
accounting standards or International Financial Reporting Standards (IFRSs). The stock exchange on which Eptilon is
listed does not require any interim financial statements and Eptilon does not currently produce such statements.
Eptilon is seeking a listing on another stock exchange that also allows financial statements to be filed that are prepared
under IFRSs but would not accept financial statements that are prepared under the local accounting standards that
are relevant to Eptilon. This stock exchange requires comparative figures for the previous year only and interim
financial reports, prepared in accordance with IFRSs, on a half-yearly basis. Therefore Eptilon wishes to adopt IFRSs
for the first time in its financial statements for the year ending 31 December 2005. The Chief Executive Officer has
three questions regarding the adoption of IFRSs in 2005:
1.

I am aware that the adoption of IFRSs will require us to make a number of changes to our existing accounting
practices and that the International Accounting Standards Board has issued IFRS 1 to detail the procedures that
need to be undertaken when adopting IFRSs for the first time. I know very little about this standard and need a
summary of what IFRS 1 requires us to do together with an indication of any practical difficulties this will give
us. Please provide me with this information addressing issues concerning the annual financial statements.
(12 marks)

2.

I dont know anything about interim financial reports. Please outline what we will need to disclose when we
prepare our first interim report for the six months to June 2005.
(6 marks)

3.

One of the most sensitive aspects of the change we are making is the future need to disclose transactions with
certain related parties. Please outline the disclosures that are needed and the parties that the disclosures apply
to.
(7 marks)

Required:
Draft a reply that answers the questions raised by the Chief Executive Officer. You should refer to specific
International Financial Reporting Standards where relevant to your reply.
(25 marks)

Iota is an entity holding securities that are publicly traded. Extracts from the income statement of the entity for the
year ended 30 September 2004 are given below:

Profit from operations

Finance cost
Profit before tax
Income tax expense
Extraordinary item
Profit for the period

Year ended 30 September

2004
2003
$000
$000
70,000
60,000
(10,000)
(10,000)

60,000
50,000
(15,000)
(12,500)
(8,000)

37,000
37,500

Before 1 April 2004 the issued capital of Iota had been 400 million $1 shares for a number of years. Then on 1 April
2004 the entity made a rights issue of one share for every four held at $4 per share. The market value of an Iota
share immediately before the rights issue was $5.
On 31 October 2004 Iota made a bonus issue of one ordinary share for every one ordinary share held at that date.
No other changes to the issued ordinary share capital occurred in October 2004. The 2004 financial statements were
approved by the directors on 30 November 2004.
Throughout the year ended 30 September 2004 Iota has had the following potential ordinary shares in issue:

Options to buy 50 million shares at $3. The average price of an ordinary share in Iota for the year ended
30 September 2004 was $5.
A $100 million loan with an annual finance cost of 10%. The loan is repayable on 30 September 2008 or
convertible into 40 million ordinary shares on that date. The rate of corporate income tax in the jurisdiction in
which Iota operates is 25%.

Required:
(a) Explain the value that disclosure of the basic and diluted earnings per share figures adds to financial
statements. You should include an analysis of the limitations of the earnings per share figures in your
discussion, bearing in mind the characteristics of useful financial information.
(14 marks)
(b) Compute the basic and diluted earnings per share for Iota that will be published in the financial statements
for the year ended 30 September 2004. You should compute a comparative figure for the basic earnings per
share but not for the diluted earnings per share.
(11 marks)
(25 marks)

[P.T.O.

Agriculture is a key business activity in many parts of the world, particularly in developing countries. Following
extensive discussions with, and funding from, the World Bank, the International Accounting Standards Committee
(IASC) developed an accounting standard relating to agricultural activity. IAS 41 Agriculture was published in
2001 to apply to accounting periods beginning on or after 1 January 2003.
Sigma prepares financial statements to 30 September each year. On 1 October 2003 Sigma carried out the following
transactions:

Purchased a large piece of land for $20 million.

Purchased 10,000 dairy cows (average age at 1 October 2003 two years) for $1 million.
Received a grant of $400,000 towards the acquisition of the cows. This grant was non-returnable.

During the year ending 30 September 2004 Sigma incurred the following costs:

$500,000 to maintain the condition of the animals (food and protection).

$300,000 in breeding fees to a local farmer.

On 1 April 2004 5,000 calves were born. There were no other changes in the number of animals during the year
ended 30 September 2004. At 30 September 2004 Sigma had 10,000 litres of unsold milk in inventory. The milk
was sold shortly after the year end at market prices.
Information regarding fair values is as follows:
Item

Land
New born calves (per calf)
Six month old calves (per calf)
Two year old cows (per cow)
Three year old cows (per cow)
Milk (per litre)

Fair value less point of sale costs

1 October 2003
1 April 2004 30 September 2004
$
$
$
20 million
22 million
24 million
20
21
22
23
24
25
90
92
94
93
95
97
06
055
055

Required:
(a) Discuss how the IAS 41 requirements regarding the recognition and measurement of biological assets and
agricultural produce are consistent with the IASC Framework for the Preparation and Presentation of
Financial Statements.
(8 marks)
(b) Prepare extracts from the income statement and the balance sheet that show how the transactions entered
into by Sigma in respect of the purchase and maintenance of the dairy herd would be reflected in the
financial statements of the entity for the year ended 30 September 2004. You do not need to prepare a
reconciliation of changes in the carrying amount of biological assets.
(17 marks)
(25 marks)

End of Question Paper