Public Sector Financial Reporting

(International version)

June 2015

Examination Guide

The Examination Guide contains all questions from the June 2015 examination paper
together with the marking scheme answers and comments from the examiner.

The answers detailed below show some but not all possible answers that were
accepted by the marking team. Marks were awarded for other valid answers that
might not be included in this guide.

The Examination Guide has been created and should be used as a study aid.

© 2015 Chartered Institute of Public Finance and Accountancy

PUBLIC SECTOR FINANCIAL REPORTING

(International version)

01 June 2015
Reading time: 10 minutes
Writing time: 3 hours

Instructions to candidates

10 minutes of reading time is allowed before starting this examination.

There are two sections in the examination.

Section A contains 20 multiple choice questions, each worth 2 marks. Answer all questions
using the answer sheet provided.

Section B contains four questions, each worth 20 marks. Answer three of four questions.

All workings should be shown. Where calculations are required using formulae, calculators may
be used but steps in the workings must be shown. Calculations with no evidence of this (for
example, using the scientific functions of calculators) will receive no credit. Programmable
calculators are not permitted in the examinations room.

Where a question asks for a specific format or style, such as a letter, report or layout of
accounts, marks will be awarded for presentation and written communication.

In this paper the unit of currency used is the pound (£), however the currency itself does not
affect the calculations, and no knowledge of the UK currency or currency market is required.

© 2015 Chartered Institute of Public Finance and Accountancy

IPFM PSFR Examination Guide June 2015

SECTION A Select one correct answer per question.

Use the separate answer sheet provided.

1 Authority A has a number of subsidiaries and a 30% share in X Ltd. The shares were
acquired 3 years ago for £520 000 when the balance on X Ltd’s accumulated surpluses
was £62 000. At the reporting date, the statements of financial position of the authority
and X Ltd were as follows:

Authority X Ltd
£ 000 £ 000
Investment in X Ltd 520 -
Other assets 2 500 1 506
Total assets 3 020 1 506

Share capital - 1 400

Contributed capital 2 250 -
Accumulated surplus 620 92
Liabilities 150 14
Total capital and liabilities 3 020 1 506

Calculate the ‘investment in associate’ to be included in Authority A’s consolidated

financial statements.

(a) £ 560 000

(b) £ 529 000

(c) £ 588 000

(d) £ 652 000

2 Which ratios would be most useful to an entity’s suppliers?

(a) Average trade payables days and the current ratio

(b) Average trade receivable days and the current ratio

(c) Gearing and interest cover

(d) Return on capital employed and surplus margin

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IPFM PSFR Examination Guide June 2015

3 Entity A owns a tangible asset which cost £15 000 and has been depreciated by £7 000
as at 31 December 2013. During 2014 the asset was improved. The cost of this
improvement was £4 000. The remaining useful economic life of the asset was also re-
assessed and determined to be 10 years from 1 January 2014.

Calculate the net book value of the asset at 31 December 2014.

(a) £6 800

(b) £7 200

(c) £10 800

(d) £17 800

4 Which of the following can be recognised as provisions:

(i) Anticipated future losses of £16m relating to a separately identifiable contract

(ii) Anticipated costs of £2m relating to a personal injury claim which is likely to be
paid
(iii) A guarantee relating to a charity which has filed for protection from its creditors
(iv) Future costs of repairing major tangible assets. Costs are estimated to be £4m.

(a) (i) and (ii) only

(b) (ii) and (iii) only

(c) (ii) only

(d) All of the above

5 Which of the following should be treated as prior period errors:

(i) Creditor balances which were omitted from the financial statements
(ii) Adjustment to the value of an asset as a result of an impairment review
(iii) Change in the discount factor used for provisions as a result of changes in market
interest rates
(iv) Changes in the net realisable value of inventory due to certain items becoming
obsolete

(a) (i) only

(b) (ii) and (iii) only

(c) (i) and (iv) only

(d) None of the above

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IPFM PSFR Examination Guide June 2015

6 Which of the following can be included in the cost of inventories:

(i) Abnormal wastage

(ii) Cost of storage of finished goods
(iii) Selling costs
(iv) Administrative overheads

(a) All of the above

(b) (ii) and (iv) only

(c) (ii) only

(d) None of the above

7 Which of the following statements is TRUE in relation to consolidating financial

statements:

(i) An entity should only be consolidated as a subsidiary when at least 50% of its
share capital is owned by the controlling entity.
(ii) Where less than 20% of the voting rights are controlled then the entity should be
accounted for as an associate.
(iii) Control may exist where the controlling entity has the power to cast the majority
of votes at a board meeting.
(iv) Control is likely to exist where the controlling entity has the power to dissolve the
other entity and obtain a significant level of residuary assets or bear significant
obligations.

(a) All of the above

(b) (i) and (iii) only

(c) (ii)and (iii) only

(d) (iii) and (iv) only

8 Blue Lake Authority owns a building which cost £1 200 000 when it was purchased in
2008. At the time of purchase it was estimated to have a useful economic life of 60 years
and zero residual value. It is the policy of Blue Lake Authority to charge a full year
depreciation in the year of acquisition.

The building is revalued every five years. At the last valuation in 2012 the value was
deemed to be £1 400 000.

Calculate the net book value of the property at 31 December 2014 and the balance on
the revaluation reserve.

(a) NBV £1 325 000DR Revaluation Reserve £200 000CR

(b) NBV £1 325 000DR Revaluation Reserve £280 000CR

(c) NBV £1 330 000DR Revaluation Reserve £220 000CR

(d) NBV £1 330 000DR Revaluation Reserve £280 000CR

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IPFM PSFR Examination Guide June 2015

9 Which of the following are short-term employee benefits as defined by IPSAS 25:

(i) salaries
(ii) pensions
(iii) holiday pay
(iv) bonuses

(a) All of the above

(b) (i), (ii) and (iv) only

(c) (i), (iii) and (iv) only

(d) (i) and (iv) only

10 According to IPSAS 29 how should ‘available for sale financial assets’ be valued in the
financial statements?

(a) Initially valued at cost, subsequently adjusted to fair value at the reporting date

(b) At amortised cost

(c) Initially at fair value and then subsequently at amortised cost

(d) At depreciated cost

11 Which of the following might be indications of impairment:

(i) Significant changes in customer tastes

(ii) Significant increases in the market value of an asset
(iii) Significant increases in market interest rates
(iv) Reduction in the useful economic life of an asset

(a) None of the above

(b) (i) and (iv) only

(c) (i), (iii) and (iv) only

(d) (i) and (iii) only

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IPFM PSFR Examination Guide June 2015

12 Authority D is being consolidated into whole-of-government accounts (WGA). Which of

the following transactions should be eliminated on consolidation:

(i) A loan from the national government to Authority D

(ii) A loan from Authority D to another public sector body also being consolidated in
WGA
(iii) Taxes paid by Authority D to the national government
(iv) Fees and charges paid by the public to Authority D

(a) All of the above

(b) (i), (ii) and (iii) only

(c) (i) and (iii) only

(d) None of the above

13 In 2013 Verde County Council set up a provision for £200 000 for a legal claim which it
expected to settle in 2014. When the claim was settled in 2014 the actual costs incurred
were only £175 000. How should this be treated in the accounts?

(a) The accounts for 2013 should be restated so that the provision costs are correctly
recorded as £175 000

(b) The difference of £25 000 should be credited to the statement of financial
performance in 2014 as operating income

(c) The balance of £25 000 on the provision should be retained to pay for future possible
legal claims

(d) The difference of £25 000 should be credited to the cash flow statement

14 Which of the following statements is TRUE in relation to IPSAS 12 Inventories?

(a) FIFO is not allowed by IPSAS 12

(b) All individual items of inventory must be separately priced and valued

(c) Inventory should be valued at the higher of cost or net realisable value

(d) The entity shall use the same cost formula for all inventories of a similar nature

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IPFM PSFR Examination Guide June 2015

15 Which of the following ratios provide information about an entity’s efficiency?

(i) Return on capital employed

(ii) Gearing
(iii) Interest cover
(iv) Non-current asset turnover

(a) None of the above

(b) (i) and (iv) only

(c) (iv) only

(d) (ii) and (iii)

16 Which of the following would require disclosure as a related party transaction:

(i) A charity buys some goods from a company owned by one of the charity’s
trustees.
(ii) A school leases some kitchen equipment from the wife of the school cook.
(iii) A local authority finance director bought shares in a wholly owned subsidiary of
the local authority.
(iv) Charity X provided payroll and finance services on behalf of Charity Y. Both
charities are owned by the same municipal authority.

(a) All of the above

(b) (iii) only

(c) (i) and (iii) only

(d) (i), (iii) and (iv)

17 Which of the following are eliminated when consolidating an associate:

(i) Money owed by the parent to an associate

(ii) Sales and purchases between associate and parent
(iii) Unrealised gains relating to sales and purchases between associate and parent
(iv) Money owed by the associate to the parent

(a) None of the above

(b) All of the above

(c) (i) and (ii) only

(d) (i), (iii) and (iv) only

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IPFM PSFR Examination Guide June 2015

18 Which of the following does the Cash Basis IPSAS require to be included in the
statement of cash receipts and payments:

(i) Cash balances

(ii) Cash payments and receipts
(iii) Payments made by third parties on behalf of the entity
(iv) Receivables and payables

(a) All of the above

(b) (i), (ii) and (iii)

(c) (ii) and (iii)

(d) (i), (ii) and (iv)

19 According to IPSAS 3, how should a change in accounting policy be treated?

(a) Prospectively

(b) Retrospective restatement

(c) Restrospective application

(d) Prospective restatement

20 XL Authority controls a number of entities and therefore prepares consolidated financial

statements. XL is also a venturer in LP Ltd, a jointly controlled entity in which XL owns
30%.

XL acquired its share of LP at a cost of £3m. At that time LP had net assets of £6m.

A summarised draft statement of financial position for XL Group (excluding LP) and LP is
as follows:

XL Group LP Ltd
£m £m
Non current assets 120 12
Current assets 45 6
Equity ( 110) ( 13)
Current liabilities ( 55) ( 5)
- -

Calculate the group’s equity including the joint venture.

(a) £112m

(b) £114m

(c) £120m

(d) £123m
Total marks (40)

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 IPFM PSFR Examination Guide June 2015

SECTION B (Answer THREE from four questions)

1
The following trial balance was extracted from the accounting records of a university at 31
December 2014.

£ 000 £ 000
Funding council grants 64 600
Academic fees and support grants 50 400
Research grants and contracts 12 750
Long term loans 70 000
Salaries and wages 71 240
Operating expenses 35 600
Research and development costs (note 1) 11 500
Land - at valuation 16 500
Buildings - at valuation 150 300
Other tangible assets at cost 24 500
Investments 35 780
Accumulated depreciation: buildings (at 1 Jan
2014) 75 150
Accumulated depreciation: other tangible
assets (at 1 Jan 2014) 11 025
Loan interest paid 4 950
Trade receivables and payables 6 598 41 925
Retained earnings (at 1 Jan 2014) 36 172
Revaluation reserve 33 850
Bank 27 404
Current asset investments 11 250
Inventory (at 31 December 2014) 250
395 872 395 872

The following additional information is available:

1. The research and development costs of £11 500 000 included in the trial balance are
made up of the following elements:

• Project 1: £2 500 000 spent on applied medical research. It is hoped that this will
ultimately lead to development of a new vaccine.
• Project 2: £4 000 000 spent on development of a new synthetic material. The
university intends to sell the technology and patent to a commercial company
within the next 12 to 18 months.
• Project 3: £5 000 000 spent on developing a new type of scanner. While the
university considers this project to be technically feasible and is aiming to complete
the project, the project is no longer a priority of the national government and at 31
December 2014 no funding had been identified to continue this project in 2015.
However on 15th January 2015 a loan was obtained from a commercial
organisation which means that the project can be completed and the scanner sold
commercially.
• The costs to complete all three projects have been reliably estimated by the
university.

2. Buildings are depreciated straight line over 40 years and other tangible assets are
depreciated at 25% reducing balance.

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IPFM PSFR Examination Guide June 2015

3. The research grants and contracts of £12 750 000 included in the trial balance are to
fund the three projects referred to in note 1 above. It is the policy of the university to
recognise income on the basis of percentage completion of the project.

Income % of project
included in completed
trial balance

£
Project 1 3 000 80%
Project 2 4 200 96%
Project 3 5 550 90%
12 750

• Requirement for question 1

(a) Prepare the statement of financial performance for the university for the year
ended 31 December 2014. (5)

(b) Prepare the statement of financial position for the university for the year
ended 31 December 2014. (6)

(c) With reference to relevant IPSAS(s), explain your treatment of the costs of
£5 000 000 which relate to Project 3. (4)

(d) With reference to relevant IPSAS(s), explain your treatment of the income of
£12 750 000 from research grants and contracts. (5)

(20)

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 IPFM PSFR Examination Guide June 2015

2
Halsetown Authority owns 60% of the equity share capital of Lelant Leisure.

The individual statements of financial performance of each entity for the year ended 31
December 2014 are shown below:

Statements of financial performance

Halsetown
Lelant Leisure
Authority
£m £m
Revenue 910 145
Direct operating expenses ( 360) ( 75)
Distribution costs ( 138) ( 29)
Admin expenses ( 245) ( 25)
Gain on disposal of non-current asset - 4
Dividend from Lelant Leisure 18 -
Finance costs ( 28) ( 1)
Surplus before tax 157 19
Tax ( 24) -
Surplus for the year 133 19
Surplus brought forward 67 6
Retained surplus 200 25

Additional information

1. During the year ended 31 December 2014, Lelant Leisure sold property, plant and
equipment with a net book value of £2m to Halsetown Authority for £6m. The group
charges depreciation on the reducing balance basis at 25% with a full year charge
made in the year of acquisition but none in the year of disposal.

2. During the year Halsetown Authority sold goods to Lelant Leisure for £15m. These
goods had cost Halsetown Authority £10m. At the year end Lelant Leisure still had 40%
of these goods in inventory.

• Requirement for question 2

(a) Prepare the group's consolidated statement of financial performance for the
year ended 31 December 2014. (10)

(b) Explain five potential benefits of preparing whole-of-government accounts

(WGA). (10)

(20)

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 IPFM PSFR Examination Guide June 2015

3
The statements of financial position for Woodlands Hospital as at 31 December 2013 and
2014 are as follows:

2013 2014
£ 000 £ 000
ASSETS
Non Current Assets
Intangible assets 6 513 7 418
Property, plant and equipment 158 000 177 000
Total non current assets 164 513 184 418
Current Assets
Inventories (drugs) 4 195 4 566
Receivables 9 762 11 755
Cash and cash equivalents 36 799 46 874
Total current assets 50 756 63 195
TOTAL ASSETS 215 269 247 613

EQUITY AND LIABILITIES

Capital contributed by government 79 163 71 246
Revaluation reserve 42 300 46 874
Retained surplus / (deficit) 76 556 88 927
Total equity 198 019 207 047

Non current liabilities

Long term borrowing 8 700 23 500
Provisions 350 507
Total current liabilities 9 050 24 007

Current liabilities
Trade and other payables 7 850 15 619
Borrowings 350 940
Total current liabilities 8 200 16 559

TOTAL EQUITY AND LIABILITIES 215 269 247 613

The hospital’s statement of financial performance for the year ended 31 December 2014 was
as follows:
2014
£
Revenue
Income from patient related activities 257 500
Other operating income 24 580
282 080
Expenses
Staff costs ( 199 500)
Drug costs ( 25 700)
Depreciation ( 10 400)
Other operating expenses ( 32 890)
( 268 490)
Interest received 134
Loss on disposal of asset ( 180)
Finance costs - interest paid ( 1 231)
Finance costs - unwinding of discount on provisions ( 7)
( 1 284)
Surplus for the period 12 306
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IPFM PSFR Examination Guide June 2015

1. During 2014 the hospital incurred costs of £1 255 000 on research and development.
Research costs of £350 000 were written off to the statement of financial performance
as 'other operating expenses'. The remainder of £905 000 were development costs
which were capitalised.

2. The loss on disposal of assets relates to some outdated medical equipment with a net
book value of £200 000. The equipment had previously been revalued by £65 000.
Half of the proceeds of sale were received on 1 October 2014 with the remainder due
to be received on 1 February 2015.

3. The receivables balances relate to income from patient related activities and the
amount owed in relation to the disposed asset referred to in note 2.

4. The payables balances relate entirely to staff costs.

5. Each year approximately 10% of the opening balance of the capital contributed by
government is repaid to Central Government. The payment of £7 917 000 was made
on 1 March 2014.

6. The revaluation reserve relates entirely to property, plant and equipment.

7. During 2014 new long term loans of £20 000 000 were received from the Hospital
Financing Facility. Some long term loans were also repaid during the year.

8. During the year ending 31 December 2014 new provisions totalling £150 000 were set
up for new medical negligence claims.

• Requirement for question 3

(a) Prepare the cash flow statement for Woodlands Hospital for the year ended
31 December 2014 using the direct method. (16)

(b) Prepare the reconciliation of net cash flows from operating activities to
surplus for Woodlands Hospital for the year ended 31 December 2014. (4)

(20)

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 IPFM PSFR Examination Guide June 2015

4
• Requirement for question 4

(a) Two sources of finance for public sector organisations are taxes and grants.
With reference to the relevant IPSAS(s), explain how each of these two
sources of finance should be treated in the financial statements of public
sector organisations. (8)

(b) Explain how the variety of sources of income in the public sector might impact
on the features of financial reporting in the public sector. (6)

(c) The following information is available on sources of funding for a housing

organisation:

2013 2014
£ £
Long term loans 5 000 10 000
Deferred grant income 3 500 3 150
Share capital 9 000 9 000
17 500 22 150

Using the formula below, calculate the gearing ratio for each year and
interpret your results. (6)

Gearing % = (Non-equity finance / capital employed) x 100

(20)

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IPFM PSFR Examination Guide June 2015

Marking Scheme for section A

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

number

1 X

2 X

3 X

4 X

5 X

6 X

7 X

8 X

9 X

10 X

11 X

12 X

13 X

14 X

15 X

16 X

17 X

18 X

19 X

20 X

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IPFM PSFR Examination Guide June 2015

Please give additional workings for more complex MCQs:

Question 1

Investment in associate
£ 000
Cost of investment 520

Share of post-acquisition
surpluses:
(30% x (92 - 62) 9

Investment in associate 529

Question 3

£000
Cost 15
Acc Depn ( 7)
NBV at 31 Dec 2013 8

Add: cost of improvement 4

Revised NBV 12
UEL 10 years
Depreciation charge for
2014 1.2

NBV at 31 Dec 2014 10.8

Question 8

£
Cost 1 200 000
Undepreciated proportion x 56 /60
NBV before reval 1 120 000
Revalued amount 1 400 000
Balance on reval reserve ( 280 000)

Revalued amount 1 400 000

Undepreciated proportion x 53 / 56
NBV at 31 Dec 2014 1 325 000

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IPFM PSFR Examination Guide June 2015

Question 20

XL Group LP Ltd
£m £m
Non current assets 120 12
Current assets 45 6
Equity ( 110) ( 13)
Current liabilities ( 55) ( 5)
- -

Calculate the groups equity including LP Ltd

XL Group equity 110

LP Ltd (13-6)x30% 2
Group equity including joint venture 112

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IPFM PSFR Examination Guide June 2015

Examiner’s comments on section A question 1

This section consisted of 20 multiple choice questions which were worth 2 marks each.
Performance was generally good in this section. The questions which seemed to cause the
greatest difficulty were those testing:

• Identifying efficiency ratios (19%)

• Accounting for associates (29%)
• Provisions (29%)
• Related party transactions (36%)

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IPFM PSFR Examination Guide June 2015

SECTION B

Marking scheme for question 1

(a)
Statement of financial performance for the university for year ended 31
December 2014

£ 000 £ 000 Marks

Revenue
Funding council grants 64 600 *
Academic fees and support grants 50 400
Research grants and contracts 11 427 0.5 (W1)
Total operating revenue 126 427

Expenses
Salaries and wages ( 71 240)
*
Operating expenses ( 35 600)
Write-off of research costs ( 2 500) 0.5 (Note 1(i)
Depreciation - buildings ( 3 758) 0.5 (W2)
Depreciation - other tangibles ( 3 369) 0.5 (W3)
Total operating expenses ( 116 467)

Surplus from operating activities 9 960

Non-operating revenue / expenses

Interest costs ( 4 950) *

Total non-operating revenue ( 4 950)

Surplus for the period 5 010

*For including other trial balance figures 0.5

Workings 2
Presentation 0.5
Total part (a) 5

Workings Marks

1. Research grants and contracts

Income % of Revenue
included in project to be
trial balance completed recognised
£ 000 £ 000
Project 1 3 000 80% 2 400
Project 2 4 200 96% 4 032
Project 3 5 550 90% 4 995
12 750 11 427 1

2. Buildings depreciation
£ 000
Buildings at valuation 150 300
Useful life 40 years
3 758 0.5
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IPFM PSFR Examination Guide June 2015

3. Other tangible assets

£
Cost 24 500
Accum depreciation ( 11 025)
Net book value 13 475

Depreciable amount 13 475

Reducing balance 25%
Depreciation for 2014 3 369 0.5

Total workings for statement of financial

performance 2

(b) Statement of financial position for the university as at 31 December 2014

£ 000 £ 000 Marks

ASSETS
Non-current assets
Property, plant and equipment 97 998 0.5 (W4)
Intangible assets (4 000 + 5 000) 9 000 1.0
Investments 35 780 **
Total non-current assets 142 778

Current assets
Inventory 250 **
Trade receivables 6 598 **
Investments 11 250 **
Cash and cash equivalents 27 404 **
Total current assets 45 502

TOTAL ASSETS 188 280

EQUITY AND LIABILITIES

Revaluation reserve ( 33 850) **
Retained earnings ( 41 182) 0.5 (W6)
Total equity ( 75 032)

Non-current liabilities
Long term borrowings ( 70 000) **
Total non-current liabilities ( 70 000)

Current liabilities
Trade payables ( 41 925) **
Deferred income ( 1 323) 0.5 (W5)
Total current liabilities ( 43 248)

TOTAL EQUITY AND LIABILITIES ( 188 280)

**For including other TB figures 1.0

Workings 2.0
Presentation 0.5
Total part (b) 6.0

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IPFM PSFR Examination Guide June 2015

Workings

4. Property, plant and equipment

Other
Land Buildings Total
tangibles
£ 000 £ 000 £ 000 £ 000
Valuation / cost 16 500 150 300 24 500 191 300 0.5
Accumulated depreciation - ( 78 908) ( 14 394) ( 93 302) 1.0
16 500 71 392 10 106 97 998

5. Deferred income - research grants and contracts

£ 000
Income included in trial balance 12 750
Less: revenue recognised in 0.5
2014 ( 11 427)
Deferred income 1 323

6. Retained earnings
£ 000
At 1 January 2014 36 172
Plus surplus in 2014 5 010
41 182

Total workings for statement of financial position 2

(c)

• IPSAS 31 governs the treatment of intangible assets including research and development
costs and IPSAS 14 governs events after the reporting date
• Development costs can be capitalized if they meet the six criteria:

Criteria Project 3
Saleable or useable by the entity Yes can be sold once complete
Technically feasible to complete Yes technically feasible
Economic benefits expected to Yes can be sold commercially to
flow generating economic benefits to
university
Measureable expenditure Yes expenditure has been measured
and included in trial balance
Intention to complete Yes intending to complete
Completable Yes. Although no funding in place at
year end, shortly after year end a
loan was obtained so that project
can be completed.

• Project 3 meets the six criteria and therefore can be capitalized. Although the loan was
obtained after the balance sheet date it provides information about balances at the
balance sheet date i.e. the costs of project 3.
• The intangible asset should not be amortised until the expected economic benefits
commence.
1 mark per well-explained point up to a maximum of (4)

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IPFM PSFR Examination Guide June 2015

(d)

• IPSAS 9 governs the treatment of revenue from exchange transactions including

income from research grants and contracts.
• Revenue is recognized when it is probable that future economic benefits or service
potential will flow to the entity and these benefits can be measured reliably.
• Where revenue relates to ‘rendering of services’ it must also be possible to (1)
reliably measure the stage of completion, and (2) reliably measure the costs
incurred and the costs to complete.
• In relation to the research grants and contracts, economic benefits of £12 750 000
have already flowed to the entity and can be measured reliably.
• Information is available on stage of completion (percentages given in note 3) and
costs to complete are known to the university.
• Revenue of £11 427 000 should therefore be recognized based on the percentage
of completion (see working 1 above) in 2014.
• The remaining amount of £1 323 000 should be held as deferred income on the
statement of financial position.
1 mark per well-explained point up to a maximum (5)

(20)

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IPFM PSFR Examination Guide June 2015

Examiner’s comments on question 1

This question related to single entity financial statements and particularly the treatment of
research and development. Candidates were required to prepare the statement of financial
performance (5 marks), the statement of financial position (6 marks), explain the treatment of
some development costs (4 marks) and finally explain the treatment of income from research
grants and contracts (5 marks).

This question was the second most popular with 73% of candidates, attempting it. . Most
candidates attempted both the numerical and narrative parts of this question and while
performance overall was a little disappointing, it was the second best answered question in this
section of the paper.

In relation to the preparation of financial statements, most candidates made a fairly full
attempt and scored fairly well. A common error related to using cost for calculating reducing
balance depreciation instead of net book value. Some candidates also struggled to decide how
to treat the research and development costs and how to recognise the income associated with
the research and development. A few candidates also spent time unnecessarily producing a full
property, plant and equipment disclosure note.

Parts (c) and (d) were generally less well answered. Candidates generally wrote very little
despite these narrative elements being worth 9 out of the 20 marks. While lengthy answers
were not required, generally candidates should assume that to earn 9 marks they will need to
make 9 clear and relevant points.

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IPFM PSFR Examination Guide June 2015

Marking scheme for question 2

(a) Group consolidated statement of financial performance for Halsetown Authority

for the year ended 31 March 2014
Marks

£m
Revenue (910+145-15) 1 040 0.5
Direct operating expenses (360+75-15+2-1) ( 421) 0.5
Distribution costs (138+29) ( 167)
0.5
Admin expenses (245+25) ( 270)
Gain on disposal of non-current
asset (4-4) -
Dividend from Lelant Leisure -
Finance costs (28+1) ( 29) 0.5
Surplus before tax 153
Tax ( 24)
Surplus for the year 129
Attributable to:
Halsetown Authority Balancing figure 123 0.5
Minority Interest 19 - 4 = 15 x 40% 6 0.5
Surplus for the year 129

Presentation 0.5
(3.5)
Workings (6.5)

(10.0)

Workings Marks

Step 1 - establish group structure

Halsetown Authority
60%

Lelant Leisure

Minority Interest 40%

Step 2 - calculate unrealised gains

£m
Goods transferred from HA to
0.5
LL 15
Cost of goods transferred ( 10) 0.5
Gain 5
Percentage unsold 40% 0.5
Unrealised gain 2

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Adjustment:
Debit Direct Operating Costs 2
Credit Closing inventory 2

Step 3 - calculate direct and operating costs

Revenue - Halsetown 910

0.5
Revenue - Lelant 145
1 055
Less: intra group sale ( 15) 0.5
Consolidated revenue 1 040

Operating costs - Halsetown 360

0.5
Operating costs - Lelant 75
435
Less: intra group purchase ( 15) 0.5
Add: unrealised gain on
0.5
inventory 2
Less: extra depreciation ( 1) 1.0
(£4m x 25%)
Consolidated operating costs 421

Step 4 - minority interest

Surplus for the

0.5
year 19
Less: gain on sale of PPE ( 4) 0.5
15
MI percentage 40% 0.5
Minority Interest 6

Total for workings 6.5

Total part (a) (10)

(b)

List and explain five potential benefits of WGA

Answers may include the following potential benefits:

Assistance in setting and monitoring of fiscal Fiscal policy is how the government uses
policy taxation and public expenditure to
influence the economy. A single set of
financial statements for the WGA group
means there is clear and audited
information on taxation and particularly
expenditure at a national level. Better
information facilitates better decision
making and financial planning across the
whole of government
Promoting consistency in financial reporting In most countries the public sector will
across the public sector include a wide range of bodies providing
different services, with different sources of
funding and often using different financial
reporting. Preparation of WGA means that
financial reporting will be aligned (at least
for WGA). Consistent reporting will make
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financial information more accessible and

understandable for users of the accounts.
Users will be able to compare
organisations and this should result in
improved public accountability
Improving capital planning Governments have to make decisions
about where capital investment should be
made. A more complete view of the public
services financial performance means that
these decisions will be better informed.
Providing users with an overall audited view of Without WGA the public cannot see what
public services performance the public services are worth in total.
WGA means that the public will be able to
see at a glance what the public services
are worth and better judge the value of
services they are receiving, improving
accountability.
Aiding financial and non-financial planning and By knowing how much is spent in total on
investment the public services and in specific areas of
the public services, investment decisions
can be better made. For example using
WGA it will be possible to see totals for
each class of non-current assets and how
the assets have been funded.
Increased accountability to stakeholders Stakeholders will be able to easily identify
the totals raised from different types of
taxation and how the money has been
spent. This will facilitate a better
understanding by stakeholders and allow
for more meaningful dialogue between
stakeholders and politians.
Ability to make comparisons with other It will be possible to compare taxation and
governments expenditure levels with other countries
preparing WGA

Up to 2 marks per relevant point of which 0.5 is for identifying the benefit and up to 1.5
for explanation

Note: No additional marks should be awarded where candidates identify more than the
required five benefits

(10)

(20)

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Examiner’s comments on question 2

This question related to group accounts and required candidates to prepare the consolidated
statement of financial performance for a parent and subsidiary (10 marks) and then explain
five potential benefits of preparing whole-of-government accounts (10 marks).

This question was the most popular with 93% of candidates attempting it and, on average, it
was the best answered question in this section of the paper.

Many candidates scored well on preparation of the group statement. Some candidates while
able to calculate the unrealised profit and excess depreciation, were not able to make the
correct adjustments in the statement of financial performance.

Re part (b), some candidates had clearly properly revised this part of the syllabus and
therefore scored well. Most candidates were able to identify a couple of potential benefits.
Many, however, continued far beyond the five benefits that were asked for whereas their time
would have been better spent identifying the best five and explaining them more fully and
devoting time to other parts of the exam instead.

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Marking scheme for question 3

(a)

Cash Flow Statement for Woodlands Hospital the year ended 31 December 2014

£ 000 Marks
Cashflows from operating activities
Receipts
Income from patient related activities (257 500 + 9 762 - (11
1.5
755-10)) 255 517
Other operating income 24 580 0.5
Interest received 134 0.5
280 231
Payments
Staff costs (199 500 + 7 850 - 15 619) (191 731) 1
Drug costs (25 700 - 4 195 + 4 566) (26 071) 1
Other operating expenses (32 890 - 150 provisions) (32 740) 1
Interest paid (1 231) 0.5
(251 773)
Net cashflows from operating activities 28 458

Cashflows from investing activities

Proceeds from disposal of PPE (W1) 10 0.5
Payments to acquire PPE (W2) (24 961) 0.5
Payment to acquire intangible assets (development costs) ( 905) 0.5
(25 856)
Cashflows from financing activities
Repayment of capital contributed by government (7 917) 0.5
Repayment of long term borrowing (W3) (5 200) 0.5
Proceeds from new long term loan 20 000 0.5
Proceeds from new short term loans (940 – 350) 590 0.5
7 473

Net increase / (decrease) in cash and cash equivalents 10 075 0.5

Cash and cash equivalents at the beginning of the year 36 799

Cash and cash equivalent at the end of the year 46 874 0.5

Marks from workings 5

Presentation 0.5

( 16)

Working 1 - Proceeds from disposal

£000
Book value 200
Loss on disposal ( 180) 0.5
Proceeds from disposal 20
Less cash not received at year end ( 10) 0.5
10

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Working 2 - Property, plant and equipment

PPE
£000 £000
Opening balance 158 000 Depreciation 10 400 0.5
Additions (bal fig) 24 961 Disposals 200 1
Revaluation 4 639 Closing balance 177 000 1.5
(46 874 + 65 -42 300) 187 600 187 600

Working 3 - Long term borrowing

LTB
£000 £000
Loans repaid
(Bal fig) 5 200 Opening balance 8 700 0.5
New loan 20 000 0.5
Closing balance 23 500
28 700 28 700

(b)

£000
Cashflow from operating activities
Surplus / (deficit) in year 12 306 0.5
Depreciation and impairment 10 400 0.5
Loss on disposal 180 0.5
Increase in inventories (4 566 – 4 195) ( 371) 0.5
Increase in receivables (11 755 – 10 – 9 762) (1 983) 0.5
Increase in payables (15 619 – 7 850) 7 769 0.5
Increase in provisions (507 – 350) 157 0.5
Net cashflows from operating activities 28 458

Presentation 0.5
( 4)

(20)

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Examiner’s comments on question 3

This question required candidates to prepare a cash flow statement using the direct method
(16 marks) and then prepare the reconciliation of net cash flows from operating activities to
surplus (4 marks). Preparation of the cash flow statement required candidates to calculate
property, plant and equipment cash additions, loans repaid and proceeds from disposal of a
non-current asset, as well as adjusting revenue and expenses for opening and closing payables
and receivables and inventory.

This question was the least popular and was only attempted by 56% of candidates.

Though performance overall was generally a little disappointing, some candidates did make a
very good attempt at the cash flow statement. The most striking point noted during marking
was that many candidates clearly do not know the difference between the direct and indirect
method. A significant number of candidates used the indirect method for the cash flow
statement and therefore immediately lost 6 out of 16 available marks. Other common errors
related to property, plant and equipment workings and not adjusting for payables, receivables
and inventory.

Re part (b), many candidates did not appear to know what was required. Those who
attempted it however generally got most of it right. The most common error related to
adjusting for provisions – this was arguably the most complex part of the question though.

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Marking scheme for question 4

(a) Treatment of taxes and grants in financial statements

Taxes Grants
IPSAS IPSAS 23 Non Exchange IPSAS 23 Non Exchange
Revenue Revenue
Recognition When taxable event occurs When asset recognition
(eg earning of income for criterial are met.
income tax) and asset
recognition criteria are met. Grants with conditions
(where the money must be
Payments on account spent as specified or
should not be recognized as returned to donor)
revenue until the tax is • Recognize asset (cash)
properly due. and associated liability
• Release liability to
statement of financial
performance as
conditions met

Grants with restrictions

over where to spend
money (but no
requirement to return)
• Recognize revenue
immediately

Measurement At fair value at the date of At fair value at date of

acquisition. acquisition.

Should not be reduced for For grants with conditions,

expenses paid through tax reduce liability as
system or grossed up for conditions are met
tax expenditures.

Other Information on ‘missing’ tax

revenue should be
disclosed.

1 mark in total for correctly identifying IPSAS 23 for both taxes and grants
Thereafter up to 1 mark per relevant point
Credit should be given for relevant points not included above
No more than 4 marks per source of finance
(8)

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(b)

Impact on financial reporting of variety of sources of income in public sector

Answers may include the following:

• A focus on the source of income – a municipal authority’s statement of financial

performance will need to show amounts raised from different sources of income so
users of the accounts can see how its operations have been funded
• A need to match income and expenditure – to ensure that funds received for specific
purposes have been applied correctly there is a need to match income and expenditure
in the statements. For example if a housing association has received grants to fund
development of new housing, it will need to be able to show that is how the funds have
been spent.
• Separating income from chargeable services – it may be necessary to separate out the
income (and costs) or chargeable services so show whether the income has covered the
costs of the service and whether there has been any cross-subsidisation of other
services.

Up to 2 marks per relevant point

(6)

(c)

2013 2014
£ 000 £ 000
Long term loans 5 000 10 000
Deferred grant
income 3 500 3 150
Share capital 9 000 9 000
17 500 22 150

Non-equity finance 8 500 13 150

All long term finance 17 500 22 150
= =
Gearing ratio 49% 59%

Comments may include the following:

• Gearing measures the proportion of non-equity to equity finance
• Non-equity finance is considered higher risk because loans must be serviced and repaid,
deferred grants may have to be repaid if grant conditions are not met
• Gearing for this organization has increased from 49% to 59% because the amount of
long term loans has doubled between 2013 and 2014
• This may make it more difficult to raise finance in the future
• Existing and potential shareholders may be concerned that they won’t get a return on
their investment because of higher interest costs or that higher interest costs will reduce
possible investment in the housing stock
• Lenders may be concerned about the organisation’s ability to service its debts

1 mark per ratio per year

Up to 4 marks for interpretation of the results
(6)

(20)

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Examiner’s comments on question 4

This question related to the area of public sector funding / financing. Part (a) required
candidates to explain how taxes and grants should be treated in the financial statements (8
marks). Part (b) required candidates to explain how the variety of sources of income in the
public sector might impact on the features of financial reporting (6 marks). Part (c) required
candidates to calculate the gearing ratio for two years from a limited data set and interpret the
results (6 marks).

The question was attempted by 64% of candidates, but was overall the least well answered
question in this section of the paper.

The better answers to parts (a) focussed specifically on how taxes and grants should be
accounted for. Many candidates however spent too much time giving examples of different
types of taxes that governments might collect or wrote about how organisations account for
taxes that they pay. Many candidates did not appear familiar with IPSAS 23 on Non Exchange
Revenue.

Better answers to part (b) concentrated on how financial reporting in the public sector is
influenced by the wide range of income sources. All reasonable points were rewarded.
Unfortunately many candidates spent most or all of their time listing the various sources of
income for public sector organisations and did not address the specific question asked.

Most candidates were able to make a couple of basic points interpreting the ratios they had
calculated. The better answers referred to possible difficulties raising more finance in the
future and the possibility of higher interest costs. The most disappointing aspect of part (c)
was that most candidates attempting the question were not able to correctly identify non-
equity finance and all long-term finance. Because of some ambiguity in the question over
whether the deferred grant income was short or long term, credit was given whether
candidates included or excluded it, as long as they did so consistently.

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Summary

The candidates that passed this exam demonstrated a good understanding of financial
reporting techniques and their application to a variety of scenarios. Successful candidates
generally provided concise, clear workings and made use of the pro-formas in numerical
questions. In narrative questions, successful candidates demonstrated that they had carefully
read the question and kept their answers focused, clear and concise, using bullet points and
table formats where appropriate. Invariably successful candidates answered three questions in
part B.

Poorer scripts tended to lack clear workings, include unnecessary calculations (thereby wasting
valuable time) and/or include more than one attempt at the same question (or parts of a
question), again a misuse of limited exam time. Narrative answers often tended to lack focus,
and appeared to form a list of everything the candidate knew about a particular subject rather
than answering the specific question asked. Although most of the poorer scripts did include
answers to three questions in part B it was usually fairly apparent that the time had not been
spent equally across the three questions and usually one question was answered significantly
better than the other two.

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