ADVANCED CORPORATE REPORTING

PROFESSIONAL 2 EXAMINATION - AUGUST 2019

NOTES:
You are required to answer ALL Questions.

Provided are pro-forma:

Statements of Profit or Loss and Other Comprehensive Income By Expense, Statements of Profit or Loss
and Other Comprehensive Income By Function, and Statements of Financial Position.

Time Allowed
3.5 hours plus 20 minutes to read the paper.

Examination Format
This is an open book examination. Hard copy material may be consulted during this examination,
subject to the limitations advised on the Institute’s website.

Reading Time
During the reading time you may write notes on the examination paper but you may not commence
writing in your answer booklet.

Marks
Marks for each question are shown. The pass mark required is 50% in total over the whole paper.

Answers
Start your answer to each question on a new page.

You are reminded to pay particular attention to your communication skills, and care must be taken
regarding the format and literacy of your solutions. The marking system will take into account the
content of your answers and the extent to which answers are supported with relevant legislation, case
law or examples, where appropriate.

Answer Booklets
List on the cover of each answer booklet, in the space provided, the number of each question
attempted. Additional instructions are shown on the front cover of each answer booklet.

The Institute of Certified Public Accountants in Ireland, 17 Harcourt Street, Dublin 2.

 THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND

ADVANCED CORPORATE REPORTNG

PROFESSIONAL 2 EXAMINATION - AUGUST 2019
Time Allowed: 3.5 hours, plus 20 minutes to read the paper. You are required to answer ALL questions.

If you make an assumption in any question,

please state your assumption clearly.

Case Study - Hometown Athletic Football Group

Hometown Athletic Football Club (Hometown) is a professional football club based in Europe. The club was founded in
1972 and is very successful, having won four league titles over the past ten years. It is the only club to have completed
a league season unbeaten.

Three months ago, in April 2019, you landed your dream job and are now financial controller of Hometown Athletic Football
Group. Having spent 10 years in various management accounting roles, you successfully applied for the position. You
are a lifelong supporter of Hometown FC, and a passionate soccer fan. This was your dream job, or so you thought!

It is 11.30pm on 26 July 2019 and you are still in your office. The weather has been beautiful for the past two weeks but
you have seen little sunshine. You have been attempting to complete the Hometown Group financial statements for the
year ended 30 June 2019. It is proving difficult. The previous financial controller left the company rather suddenly in April,
and his work files are in a bit of a mess. On top of that, the Chief Financial Officer, Patrick Cordon, is on holiday in Australia
celebrating his 25 year wedding anniversary. He is not available for another two weeks. You are feeling rather tired and
deflated. This is not how you envisaged life as financial controller of your favourite club.

However, you are making progress. In the last two days, you have managed to prepare a first draft of the financial
statements of Hometown and each of its two subsidiaries, Salvon Ltd. (Salvon) and Exonic Ltd. (Exonic) - see Appendix
1 on pages 5 and 6. Salvon is a sports retailing company acquired by Hometown in 2003 for €40m when Salvon’s
reserves were €22m. Hometown owns 75% of Salvon’s equity share capital. The other subsidiary, Exonic, is a 3 star hotel
group whose properties are located close to large football stadia. On 1 July 2018, Hometown acquired 90% of the net
assets of Exonic when Exonic’s reserves stood at €17m. This acquisition has proven to be difficult as there was a delay
in establishing the fair values of net assets at the date of acquisition. These values arrived by email just this morning but
they have not been incorporated into the draft accounts below. The acquisition of Exonic was funded by issuing bonds
that are repayable in six years’ time.

You are now ready to tackle the list of outstanding matters that need to be resolved before you meet with the CEO,
Frances Pollock, next week (the list is summarised below). The CEO has quite a knowledge of accounting and has e-
mailed you with two further specific points which she would like to discuss with you next week.

The first point refers to the quality of corporate reporting. In her email, the CEO states ‘From discussions with the previous
financial controller, I gather that many new International Financial Reporting Standards have been issued recently and I
have to wonder if such changes will actually make any difference at all to the quality of corporate reporting’. The second
point in the email from the CEO states ‘I believe that, given positive economic forecasts and a strong transfer market,
Hometown would be better moving to fair value measurement, wherever possible. The reported value of the group assets
will be higher under fair value accounting and any increase in asset value will be reported in full in the income statement.
It’s a win-win situation. However, I am concerned that the re-emergence of the Prudence concept in the revised Conceptual
Framework will put a stop to fair value measurement in financial reporting. I would like your expert advice on this matter’.
So here you are. It is midnight and you need to sleep. You shut down your computer and pack away your files. As you
close your office door and venture out into the balmy midnight air you think…Oh well at least Hometown finished top three
in the league this year. Olé!

Page 1
OUTSTANDING ISSUES IN RESPECT OF THE HOMETOWN GROUP FINANCIAL STATEMENTS 30 June 2019.
Note: You may assume that the transactions below are net of taxation

1. Hometown’s accounting policy for intangible assets (which includes the costs of acquiring players and key football
management staff registrations) is to capitalise costs associated with the acquisition of player and key football
management staff registrations and amortise these costs in equal annual instalments over the period of the
respective contracts. However, the following matters have not been resolved:

(i) Jordan Hughes, a midfielder, was acquired by the club on 1 July 2016 for a transfer fee of €10m. He signed
a contract with the club for five years. On 1 July 2018, Hughes suffered a knee injury which prevented him
from playing for the 2018/2019 season. He had not returned to full fitness by the end of the year and medical
reports suggest that he may never make a full recovery. Hometown could transfer him to a second division
club for €2m (less disposal costs of €80,000) while his value-in-use is estimated to be €1.5m. At this point,
there is no firm decision in place to sell Hughes and no amortisation charge has been made for this player
in 2019.

(ii) One of football’s rising stars is Bobby Belling. Belling plays in defence for Hometown. Belling signed a five-
year contract in 2017 and a transfer fee of €50m was paid to sign him. A number of offers have subsequently
been made to buy Belling. The estimated market value for the player at 30 June 2019 was €90m. Although
Belling is not on the market, the CEO would like to revalue this player in the financial statements to reflect
his fair value (you may assume that the 2019 amortisation charge has already been included in the draft
figures).

In addition to the transfer fee paid for Belling, the contract also includes a clause that further fees will be
payable to the vendors, from whom he was bought, should he make a specified number of first team
appearances. It looks probable that by the end of 2019, the specified number of appearances will be
achieved. If that happens, additional fees of €8m will be payable during 2020. No adjustments have been
made to the financial statements to reflect this.

(iii) Pierre Caron was signed in 2018 for €22m for a period of five years. The French player was signed with the
hope of bringing Hometown to the Champions’ League in 2019. However, his performance so far has been
disappointing. He scored just four goals in 26 appearances. A decision to sell Caron was made in May 2019,
and an offer was made by another club before the financial year end. A transfer fee of €16.5m was tentatively
agreed. However, the full details of the contract are subject to negotiation. It could take months to finalise
the deal. Under official rules, a football club may consider expressions of interest from other clubs until the
final contract is signed. You estimate that it will cost €0.3m to complete the deal. Although the 2019
amortisation charge for Caron has been included, no adjustment has been made in the financial statements
to reflect his sale and transfer.

2. Hometown sell a fixed number of season tickets each year. These tickets go on sale in June, prior to the
commencement of the following football season. There are two types of season ticket, SK1 and SK2. SK1 is the
basic package which comprises entry to 19 home matches. SK2 gives the holder additional rights to buy discounted
tickets for cup ties and European games. The season tickets, once purchased, are non-refundable.

In June 2019, the following 2019/2020 season tickets were sold:

Number of Tickets Ticket Type Price per ticket

10,000 SK1 €490
12,000 SK2 €595

The cash relating to season ticket sales for the 2019/2020 season was recorded in current revenue. The previous
financial controller put a note on the file to say that he accounted for the season tickets in this way as the ticket
fees are non-refundable. As a consequence, there would never be any obligation on Hometown to repay the
amounts received.

3. In July 2018, Hometown signed a four-year sponsorship deal with a large insurance company, RON. The terms of
the deal were that RON would pay €100m upfront in exchange for having its name and logo displayed on the
football team shirts and on various advertisement boards located in the stadium. The payment was entered in the
accounts as a debit to Cash & Cash Equivalents and a credit to Non-Current Financial Liabilities. No other entries
have been made in relation to this income in the 2019 draft financial statements.

Page 2
 A separate payment of €10m was due from RON in June 2019. This relates to pre-sponsorship support and
exposure in the months leading up to the sponsorship period. Although RON has been invoiced for this payment,
no entries have been made in the draft statements. You are unsure if you can claim all of this as revenue in 2019,
or if it should be spread over the sponsorship period.

4. Hometown’s club stadium is included under Property, plant and equipment in the Club’s statement of financial
position. The stadium cost €200m to construct in 2013. The accounting policy of the Hometown group states that
property is held at historic cost and is depreciated over 50 years.

During the months of July and August 2018, the club leased the stadium to ‘GoRock’, a concert promoter. Two music
festivals were held on the premises during this period, generating income of €5m for the club, which was credited
in full to revenue. You are now reviewing the provisions of IFRS16 - Leases and are wondering if the existing
accounting entry is correct. You have finished reading the first half of IFRS16, the section on lessee accounting,
so you know something about Right of Use Assets, Lease Liabilities and Effective Interest Rates. You have done
calculations and now estimate that the present value of the lease payments at an effective rate of interest over a
three-month period is €1.9m. However, you are not sure what to do next.

5. The following values relate to Exonic as at 1 July 2018. As mentioned above, these valuations arrived by email just
this morning so they have not been incorporated into the draft accounts:

Asset Book Value Fair Value Difference

on 1 July 2018 on 1 July 2018
€000 €000 €000
Property, plant and equipment 41,000 43,000 2,000
Inventory 1,400 1,100 (300)
Trade receivables 5,900 5,300 (600)

On the date of acquisition, Property, plant and equipment had a remaining useful life of 25 years. There were no
items of Property, plant and equipment sold during the year, but the inventory purchased was sold at a profit before
the 2019 year end and receivables were collected in full.

You can assume that, for Salvon, the book values of net assets at the date of acquisition were equal to their fair
value.

6. The acquisition of Exonic on 1 July 2018 was financed by issuing bonds for €30 million. These bonds have a par
value of €33.5 million and an interest rate of 4% pa. The terms of the loan contracts state that interest on the loan
is paid annually while the principal will be repaid in 6 years’ time. The effective interest rate on the loan is 5%. The
bonds were issued on 1 July 2018, and the effective rate is equal to the cost of borrowing for Hometown. The
previous financial controller was unsure regarding what to do with the loan. The only entry made was to debit Cash
& Cash Equivalents and credit Non-Current Liabilities with €30 million. The actual interest paid on the loan for the
year ended 30 June 2019 has been properly treated in the financial statements. You have established that
Hometown FC’s financial liabilities should be stated at amortised cost.

7. It has come to your attention that no accrual has been made by Hometown FC for outstanding staff holiday
entitlements over the past four years. Based on your calculations, you estimate that €1.1m should have been
accrued in the financial statements at the end of each of the years 2016 to 2018. Upon further review, you establish
that apart from €600,000, all of these entitlements had been taken before the end of 2019. Holiday benefit
entitlements relating to 2019 and outstanding at the year-end are estimated at €1,250,000. You should assume
that holiday leave can be carried forward indefinitely.

In addition, an actuarial review has been carried out on the company’s defined benefit pension plan, and you have
been provided with the results. It is estimated that the present value of the defined pension obligations is now
€20m (currently stated at €22.5m) and the market value of plan assets is €13.3m (currently stated at €12.5m).
The defined obligations have been calculated using a market discount rate of 8%.

8. A review of Salvon’s accounting records, along with correspondence from a payments officer, has alerted you to
some fraudulent activity within the Group. This also explains why the previous financial controller left the company
in such a hurry. It has been discovered that the former controller had been transferring funds for a number of
months from Salvon’s online bank accounts to another account which now transpires was in his own personal
name. The total amount transferred was €450,000. The payments officer is shocked and upset, having enjoyed
working with the previous financial controller. ‘He was so charming’. Aware that she has contravened company
policy by granting full access to the bank accounts, she just cannot believe this could happen. She has asked you
Page 3
 if it would be possible to omit this event from the 2019 accounts. Knowing that she is in trouble and will probably
lose her job over it, she would like you to ‘roll this on a year’ so that she might have an opportunity at securing
another job before anyone notices. ‘Anyway’ she says proudly displaying her knowledge of International Financial
Reporting Standards, ‘IAS10 – Events after the Reporting Period states that events that occur after the reporting
period are non-adjusting. As this fraud was only discovered in July 2019 it would be correct accounting procedure
to report it in the 2020 financial statements and not 2019…. I will be well gone by then’.

She has also informed you that the former financial controller has left the country and it is unlikely that Hometown’s
senior management will be able to locate him or recover the funds.

9. Goodwill incurred on the acquisition of both subsidiaries, was calculated using the parent entity/ proportionate net
assets method. You have now established, following an impairment review on 5 July 2019, that the recoverable
value of both subsidiaries remains higher than their carrying values.

REQUIREMENT:

(a) Prepare a memorandum which:

(i) Evaluates and analyses each of the items 1 to 9 on Pages 2 to 4. Your evaluation and analysis should
include justification, based on appropriate IFRS, for your recommended treatment as well as the relevant
calculations of how these will impact the consolidated statement of financial position and the consolidated
statement of profit or loss and other comprehensive income for the Hometown Athletic Football Group.
(45 marks)

(ii) Includes the consolidated statement of profit or loss and other comprehensive income and the consolidated
statement of financial position of the Hometown Athletic Football Group for the year ended 30 June 2019 in
accordance with relevant IFRS (showing all relevant workings).
(30 marks)

(b) In preparation for your meeting with the CEO next week, prepare a brief report which:

(i) Addresses her query over the quality of corporate reporting. In writing this section of the brief report, you
should refer to the following International Financial Reporting Standards and explain to what extent each
Standard may have contributed to an improvement in the quality of corporate reporting.

• IFRS15 - Revenue from Contracts with Customers

• IFRS16 - Leases (15 marks)

(ii) Discusses the concept of Prudence in corporate reporting. In this section of your report, you should explain
with reference to relevant International Financial Reporting Standards what the concept of Prudence means,
outline the current practice of prudence in financial reporting, and address the concerns of the CEO on the
possible effect that the re-introduction of the prudence concept may have on the application of fair value
measurements in financial reporting.
(10 marks)

Page 4
Appendix 1:
The draft financial statements for the HOMETOWN Athletic Football Club, SALVON Ltd. AND EXONIC Ltd.

Draft statements of financial position as at 30 June 2019

Hometown Salvon Ltd. Exonic Ltd.

€'000 €'000 €'000
ASSETS
Non-Current Assets
Property, plant and equipment (NBV) 360,000 30,000 40,000
Intangible Assets 540,000 10,000
Investment in SALVON 40,000
Investment in EXONIC 30,000
Other financial Assets 20,000
990,000 40,000 40,000

Current Assets
Inventories 7,600 4,000 1,000
Trade Receivables 50,000 40,000 6,000
Cash and cash equivalents 4,000 8,000 300
61,600 52,000 7,300

TOTAL ASSETS 1,051,600 92,000 47,300

EQUITY and LIABILITIES

Equity
Ordinary shares €1 shares 200,000 20,000 12,500
Share Premium 116,000
Retained Earnings 305,500 66,000 20,000
621,500 86,000 32,500

Non-Current Liabilities
Financial Liabilities 209,000 12,000
Provisions 400 400
Retirement Benefits 10,000
219,000 400 12,400

Current Liabilities
Payables 184,080 4,400 2,000
Financial Liabilities 25,920
Current Taxation 1,100 1,200 400
211,100 5,600 2,400

TOTAL EQUITY AND LIABILITIES 1,051,600 92,000 47,300

Page 5
Draft statements of profit or loss and other comprehensive income for the year ended 30 June 2019

Note: Player Trading represents amortisation, impairment and profit (loss) on disposal of intangible non-current assets,
and other football trading-related income and expenditure

Hometown Salvon Exonic

€'000 €'000 €'000
Operations Player
Excluding Trading
Player Trading (note) Total
€'000 €'000 €'000
Revenue 1,308,000 1,308,000 80,000 63,400
Operating Expenses (520,000) (160,000) (680,000) (32,000) (56,000)
Operating profit/Loss 788,000 (160,000) 628,000 48,000 7,400
Finance and Other Income 8,000
Finance Costs (10,000) (4,000) (2,200)
Profit on Ordinary
activities before tax 626,000 44,000 5,200
Taxation (2,400) (4,000) (2,200)
Profit for the period 623,600 40,000 3,000

Page 6
 SUGGESTED SOLUTIONS

THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND

ADVANCED CORPORATE REPORTNG

PROFESSIONAL 2 EXAMINATION - AUGUST 2019

(a) Memorandum

Prepared by: A.N. Accountant, CPA, Financial Accountant, Hometown Athletic Football Group
Date: 27 August 2019
Re: Annual Financial Statements for the Year to 30 June 2019 and Matters Arising

I have included in Appendix 1 to this memorandum an analysis and explanation of the accounting treatment required
under IFRS for the issues outstanding, as of yesterday, with regards to the preparation of the Group financial
statements for the year ended 30 June 2019. The impact of the treatment of each issue is clearly shown. Appendix 2
contains the draft consolidated financial statements for the year in question.

I will be pleased to discuss any matters relating to these.

__________________
A.N. Accountant, CPA

Page 7
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Page 11
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Page 14
(b)

(i) Prepare a brief report that addresses the CEOs query over the quality of corporate reporting. In writing this
section of the brief report, you should refer to the following International Financial Reporting Standards and
explain to what extent each Standard may have contributed to an improvement in the quality of corporate
reporting.

• IFRS15 - Revenue from Contracts with Customers

• IFRS16 - Leases

IFRS15 - Revenue from Contracts with Customers

The objective of IFRS15 is to specify how and when an IFRS reporter will recognise revenue as well as
requiring each entity to provide users with more informative and relevant disclosures. The standard provides a
single, principle based five-step model to be applied to all contracts with customers. IFRS15 applies to an
annual reporting period beginning on or after 1st January 2018. IFRS 15 replaces IAS11 Construction
Contracts and IAS18 Revenue.

How has IFRS15 improved the quality of financial Reporting?

The overall purpose of introducing IFRS15 is to prevent businesses from deliberately manipulating financial
statements by delaying or accelerating revenue. In particular:
1. IFRS15 provides comprehensive guidance on how to recognise revenue in the financial statements. This
is achieved through the introduction of a five-step model. The five step approach guides the user on how
to determine when to recognise revenue and at what amount. There was no such structured guidance in
IAS18/IAS11.

2. IFRS 15 is more prescriptive than the previous revenue guidance and introduces more complexities.
IFRS 15 provides application guidance on a number of topics. This was not available in IAS11 or IAS18.

3. IFRS 15 contains more detailed guidance regarding the provision of distinct goods or services.
Therefore, goods or services that were previously bundled under IAS 18 may now be distinct and
accounted for as separate performance obligations under IFRS 15.

4. IFRS15 compels the user to consider carefully when revenue is recognised. Step 5 deals with ‘when’
revenue is recognised. Is it at a ‘point in time’ or is it over time? Entities need to re-evaluate when to
recognise revenue.

5. The revenue recognition model has changed from being focused on the transfer of the risks and rewards
of ownership (IAS 18) to being based on the transfer of control (IFRS 15).

6. IFRS15 is disclosure driven. Disclosure requirements are more extensive than with previous standards.
Disclosures are both quantitative and qualitative giving users more useful information about the activities
of entities

7. IFRS15 is a global standard. This will improve consistency and comparability between entities financial
statements.

IFRS16
IFRS16 Leases was issued in January 2016 and applies to annual reporting periods beginning on or after the
1st January 2019. The purpose of IFRS16 is to give guidance on how assets held under lease contracts are to
be presented in the financial statements. Under IFRS16 lessees are required to recognize assets and liabilities
of all leases, unless the lease term is less than 12 months or the lease is of a low value. Lessors continue to
classify leases as either finance or operating leases.

How has IFRS16 improved the quality of financial Reporting?

1. The introduction of IFRS16 has addressed the long run problem for investors and investment analysts of
off-balance sheet financing relating to leasing contracts. By requiring companies to present leasing
contracts as assets and liabilities, visibility of lease contracts will become clearer.
2. The increased visibility of all leases will lead to better informed investment decisions by investors.
3. The IASB have stated that recognising assets and liabilities on the statement of financial position for all
leases provides a more faithful representation of the financial position of a company and greater
transparency about the company’s gearing levels and capital employed. This is expected to enable
investors and analysts to better assess the financial position and financial performance of a company.

Page 15
 4. The IASB expects that there will no longer be a need to present lease-adjusted ‘non-GAAP’ information
after IFRS 16 is effective. This practice was widely used by investment analysts when making
comparisons between different companies.
5. From the company viewpoint IFRS16 levels the playing field for companies by allowing transparent
comparison between businesses. It also will lead to a more balanced lease-versus-buy decisions by
management.

(ii) Prepare a brief report on the concept of Prudence in Financial Reporting. In your report you should explain
what the concept of prudence means, outline the current practice of prudence in financial reporting and
address the concerns of Francis Pollack CEO on the possible effect that the re-introduction of the prudence
concept may have on the application of fair value measurements in financial reporting.

Prudence in Financial Reporting

The preparation of financial statements requires the IFRS preparer to use professional judgement in selecting
accounting policies and estimates. Prudence requires that accountants should exercise a degree of caution in
the adoption of policies and significant estimates so that assets are not overstated and liabilities and expenses
are not underestimated. A prudent approach is important to ensure that financial information is relevant and
faithfully represents the substance of financial information without being overstated or understated. In other
words, prudence implies that the information is neutral.

The concept of prudence was removed from the 2010 version of the Conceptual Framework. It was claimed at
that time that prudence was not the same as neutrality. Prudence was deemed to lead to an asymmetrical
focus on understatement rather than objectiveness. However its absence led to confusion for IFRS preparers.
The revised Conceptual Framework has re-introduced the concept of prudence. The IASB has stated that it
believes that prudence supports the neutrality of information.

The CEO is concerned that the re-emergence of the prudence concept will put a stop to fair value
measurement in financial reporting. This is not the case. Prudence simply means that IFRS preparers should
be cautious in estimating fair values. The prudence concept will not put an end to fair value measurement as
long as the fair value is measured reliably and faithfully represented. (This will be particularly relevant when an
active market does not exist and estimates need to be made).
Prudence will not replace fair value measurement – it will simply enhance it.

[Tutorial note: Although the term ‘prudence’ was not stated in financial reporting regulation for a number of
years, it has always been implied in the application of specific accounting standards. For example IAS2
requires an entity to measure inventory at the lower of cost and net realisable value. (An increase in the market
value of goods is not considered). IAS37 requires that provisions are accrued when a liability is probable
(while assets are recognised only when there is ‘virtual certainty’). Further exercise of prudence is evident in
the application of IAS36 Impairment of Assets where assets are adjusted to recoverable value only when their
value is lower than their carrying value. There are many other examples too.
IFRS13 itself refers to prudence in that it makes clear that in considering the fair value of the most difficult class
of assets and liabilities to value (‘level 3’), ‘it might be necessary to include a risk adjustment when there is
significant measurement uncertainty’.]

Page 16