PROFESSIONAL LEVEL EXAMINATION

TUESDAY 6 JUNE 2017

(3 hours)

FINANCIAL ACCOUNTING AND REPORTING

IFRS
This paper consists of four questions (100 marks).

1. Ensure your candidate details are on the front of your answer booklet. You will be given
time to sign, date and print your name on the answer booklet, and to enter your
candidate number on this question paper. You may not write anything else until the
exam starts.

2. Answer each question in black ballpoint pen only.

3. Answers to each question must begin on a new page and must be clearly numbered.
Use both sides of the paper in your answer booklet.

4. The examiner will take account of the way in which answers are presented.

5. When the assessment is declared closed, you must stop writing immediately. If you
continue to write (even completing your candidate details on a continuation booklet), it
will be classed as misconduct.

Unless otherwise stated, make all calculations to the nearest month and the nearest £.

All references to IFRS are to International Financial Reporting Standards and

International Accounting Standards.

IMPORTANT

Question papers contain confidential You MUST enter your candidate number in this
information and must NOT be removed box.
from the examination hall.

DO NOT TURN OVER UNTIL YOU

ARE INSTRUCTED TO BEGIN WORK

Copyright © ICAEW 2017. All rights reserved. Page 1 of 8

1. The following trial balance has been extracted from the nominal ledger of Ballabriggs plc at
31 December 2016.

Note(s) £ £
Purchases 741,800
Administrative expenses 211,500
Other operating costs (1), (2), (3) 98,700
Trade and other receivables (4) 208,850
Trade and other payables 95,240
5% Irredeemable preference share capital (£1 200,000
shares) (3)
Retained earnings (5) 101,210
Ordinary share capital (£1 shares) (5) 600,000
Plant and machinery (6)
Cost 1,212,920
Accumulated depreciation at 31 December 2015 305,600
Share premium account 60,000
Cash at bank 6,230
Finance costs 560
Inventories at 31 December 2015 85,600
Sales 1,012,400
Provision at 31 December 2015 (7) 175,000
Income tax (8) 4,250
2,559,930 2,559,930

Notes:

(1) Ballabriggs plc rents all its properties under operating leases, with rental costs
presented in other operating costs. On 1 July 2016 Ballabriggs plc moved into a new

payable in advance on the first day of each month, for a ten year lease. The managing
director negotiated zero payments for the first six months of the lease such that no rent
was paid in 2016. As a result, rent for the last six months of the lease will be £2,000 per
month. No rent has been charged in the trial balance above in respect of this property.

(2) On 31 December 2016 the company vacated its Canal Turn property. The lease on
Canal Turn expires on 31 December 2019 and the rent is £20,000 annually, paid in
arrears on 31 December. The conditions of the lease do not allow Ballabriggs plc to
sublet the property. The rent paid on 31 December 2016 was debited to other operating
costs and credited to cash.

(3) On 1 July 2016 Ballabriggs plc issued 200,000 5% £1 irredeemable preference shares
at par. The payment of the dividend is at the discretion of Ballabriggs plc. The
appropriate dividend of £5,000 was paid on 31 December 2016 and was debited to
other operating costs and credited to cash.

Copyright © ICAEW 2017. All rights reserved. Page 2 of 8

(4) During 2016 a material error made in the previous year was identified, which has not yet
been corrected. An invoice for £22,500 had been entered twice into the sales day book
on 10 December 2015, and was duly posted twice to the relevant accounts. Due to a
dispute over the amount owed by the customer neither the original invoice nor its
duplicate had been paid by 31 December 2016 but the customer has now agreed to pay
the outstanding £22,500.

(5) On 1 March 2016 Ballabriggs plc made a 1 for 5 bonus issue, debiting retained earnings
and crediting ordinary share capital. The directors now wish to amend their original
treatment and utilise the share premium account for this bonus issue as far as possible.
An interim ordinary dividend of 5 pence per share was paid on 31 October 2016,
debited to retained earnings and credited to cash.

(6) Plant and machinery is measured using the cost model and is depreciated using the
reducing balance method at 10% pa. No depreciation charge has yet been recognised
for the year ended 31 December 2016. Depreciation charges should be presented in
cost of sales.

(7) The £175,000 provision in the trial balance relates to a legal case brought by an
employee who had been injured at work. The amount of the provision at 31 December
2015 was based on the facts available at the time and had been expected to be settled
within the next year. On 15 October 2016 the claim was settled out of court for cash of
£100,000 and the payment was debited to administrative expenses and credited to
cash.

(8) The income tax figure in the trial balance represents an overprovision for the year
ended 31 December 2015. Ballabriggs income tax liability for the year ended
31 December 2016 has been correctly estimated at £5,600 but is not included in the
above trial balance.

(9) Inventories at 31 December 2016 cost £118,600.

Requirements

1.1 Prepare the following for the financial statements of Ballabriggs plc for the year ended
31 December 2016, in a form suitable for publication:

(a) a statement of profit or loss

(b) a statement of financial position
(c) a statement of changes in equity (a total column is not required).

Note: An appropriate discount rate is 7% pa.

(22 marks)

1.2 refers to four enhancing qualitative characteristics:

comparability, verifiability, timeliness and understandability. Explain how these
enhancing qualitative characteristics help ensure that financial statements are useful to
users. (5 marks)

Total: 27 marks

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2. You are an ICAEW Chartered Accountant working as a temporary employee at Papillon Ltd.
The managing director has asked you to check and redraft the following disclosure note as
he is concerned that it may contain errors. The note was prepared by Anthony, the finance
director of Papillon Ltd, who is also an ICAEW Chartered Accountant. All the directors of
Papillon Ltd are entitled to a bonus based on a percentage of the profit for the year.

Land and Plant and

buildings equipment
£ £
Cost/valuation
At 1 January 2016 1,250,600 526,800
Additions 75,600
Revaluation 100,000
At 31 December 2016 1,350,600 602,400

Accumulated depreciation
At 1 January 2016 345,600 316,000
Charge for the year 25,100 60,240
At 31 December 2016 370,700 376,240

Carrying amount
At 31 December 2016 979,900 226,160
At 31 December 2015 905,000 210,800

Notes:

(1) Land and buildings are carried under the revaluation model and plant and equipment is
carried under the cost model. The depreciation charges in the table above were
calculated using the depreciation methods in place at 31 December 2015.

(2) The revaluation during the year related to a piece of land which had previously been
valued in 2014 at £350,000. The land had cost £332,600 in 2012. The land was
revalued for the first time in 2014 when the excess of valuation over carrying amount
was credited to the revaluation surplus.

The revaluation during the year was based on a report commissioned by Anthony from
Bobbyjo LLP, a firm of chartered surveyors wholly- . The other
The report showed
the value for land at £450,000 on 31 December 2016. Bobbyjo LLP invoiced Papillon
Ltd £1,000 for the report in January 2017 and Papillon Ltd accrued for this invoice at
31 December 2016. Anthony recognised the revaluation increase as income in the
statement of profit or loss for the year ended 31 December 2016 on the grounds that in
early 2017 the directors decided to sell this property.

The land was sold in February 2017 for only £325,500, following the discovery in early
January 2017 that the land had been contaminated in the previous year and needed
remedial work to restore it to a useable condition. The land did not meet the definition of
a held for sale asset at 31 December 2016.

Copyright © ICAEW 2017. All rights reserved. Page 4 of 8

(3) On 1 January 2016 Papillon Ltd entered into a three-year finance lease for equipment
with a fair value of £62,000. An initial lease payment of £16,000 was made on 1 January
2016. Three further annual instalments of £16,000 each are due in arrears, the first of
which was paid on 31 December 2016. The machine has a useful life of four years. The
present value of the minimum lease payments at 1 January 2016, based on an annual
interest rate of 5%, is £59,571. Anthony debited the actual lease payments made in the
year to plant and equipment, and they are included in additions in the table above.

(4) The only other figure included in additions to plant and equipment was a machine
purchased on 1 September 2016.

(5) The following have not been reflected in the table above:

A machine was sold for scrap on 1 January 2016. The machine had cost £15,000
on 1 January 2009 and was sold for cash of £800. Anthony credited the cash
received to revenue.

On 1 January 2016 the directors decided to change the depreciation method for
plant and equipment from a straight-line basis over a ten year useful life to 20%
reducing balance as this is considered to be a better reflection of the consumption
of economic benefits.

Anthony discovered that you have been asked to redraft the property, plant and equipment
note. He said that if you can overlook any errors made he will recommend you for a
permanent job with Papillon Ltd.

Requirements

2.1 Explain how the matters described in Note (2) above should have been dealt with in
financial statements for the year ended 31 December 2016. (8 marks)

2.2 Redraft the disclosure note showing the movements on property, plant and equipment
financial statements for the year ended 31 December
2016. A total column is not required, nor are you required to provide any additional
narrative disclosures. (8 marks)

2.3 In so far as the information is available, p

of cash flows for the year ended 31 December 2016 showing:

cash flows from investing activities;

cash flows from financing activities; and
the reconciliation of profit before tax to net cash from operating activities.
(4 marks)

2.4 Discuss the ethical issues arising for you and Anthony from the above scenario and the
actions that you should take. (5 marks)

Total: 25 marks

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3. On 1 January 2016 Corbiere plc held a number of insignificant investments in equity
instruments that do not have a quoted price and are therefore carried at cost. During the year
ended 31 December 2016 Corbiere plc acquired a subsidiary company, Seagram Ltd, and an
associate, Minnehoma Ltd. The draft, summarised statements of financial position of
Corbiere plc and its subsidiary company at 31 December 2016 are shown below:

Corbiere Seagram
plc Ltd
£ £
ASSETS
Non-current assets
Property, plant and equipment 1,162,800 321,390
Investments 774,500
1,937,300 321,390
Current assets
Inventories 523,600 398,500
Trade and other receivables 401,860 203,650
Cash and cash equivalents 52,600 1,100
978,060 603,250

Total assets 2,915,360 924,640

EQUITY AND LIABILITIES

Equity
Ordinary share capital (£1 shares) 600,000 200,000
Share premium account 100,000 50,000
Retained earnings 1,776,260 502,540
2,476,260 752,540

Current liabilities
Trade and other payables 385,200 148,500
Income tax 53,900 23,600
439,100 172,100

Total equity and liabilities 2,915,360 924,640

Additional information:

(1) Corbiere plc acquired 80% of the ordinary shares of Seagram Ltd on 1 July 2016 when
the retained earnings of Seagram Ltd were £404,000. The consideration was made up
of cash of £650,000 paid on 1 July 2016 and a further cash payment of £147,000,
deferred until 1 July 2017. No accounting entries have been made in respect of the
deferred cash payment. An appropriate discount rate is 5% pa. Corbiere plc recognises
goodwill and non-controlling interests using the fair value method.

The fair values of the assets, liabilities and contingent liabilities at 1 July 2016 were
equal to their carrying amounts with the exception of a machine which had a fair value
£60,000 in excess of its carrying amount. This machine had a six year remaining useful
life on 1 July 2016.

The fair value of the non-controlling interest in Seagram Ltd on 1 July 2016 was
estimated at £150,000.

Copyright © ICAEW 2017. All rights reserved. Page 6 of 8

(2) In December 2016 Seagram Ltd sold goods to Corbiere plc for £16,000. Corbiere plc
still held half of these goods in its inventories on 31 December 2016. Seagram Ltd
marks up all goods by 25%.

On 31 December 2016 Seagram Ltd 6,000 due

1,000 in
respect of this transaction, as it had made a payment of £5,000 to Seagram Ltd on
31 December 2016.

(3) On 1 January 2016 Corbiere plc acquired 30% of the ordinary shares in Minnehoma Ltd
for cash of £120,500, which gave Corbiere plc significant influence over Minnehoma Ltd.
At that date a property owned by Minnehoma Ltd had a fair value £50,000 in excess of
its carrying amount. This property had a remaining useful life of 20 years on 1 January
2016.

In the year ended 31 December 2016 Minnehoma Ltd made a profit of £56,800, out of
which it paid a dividend of £20,000 on 30 October 2016. Corbiere plc debited the
dividend received to cash and credited it to investments.

Requirements

3.1 Prepare the consolidated statement of financial position of Corbiere plc as at

31 December 2016. (19 marks)

3.2 Calculate Corbiere plc distributable profit at 31 December 2016, explaining your
calculation. (3 marks)

3.3 Describe any differences between IFRS and UK GAAP in respect of the calculation and
subsequent treatment of goodwill arising on consolidation. (4 marks)

Total: 26 marks

PLEASE TURN OVER

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4. The following matters need to be dealt with to finalise the financial statements of Bindaree
Ltd for the year ended 31 December 2016.

(1) On 1 January 2016 Bindaree Ltd

time, to help fund the construction of a new factory. The funds were immediately placed
on deposit at interest of 3% pa. On 1 February 2016 the company purchased land for
£200,000 but construction did not start until 1 July 2016, when Bindaree Ltd paid the
construction company £100,000. Work on the factory was still in progress on
31 December 2016 when Bindaree Ltd paid a further £100,000 to the construction
company. All relevant interest was received and paid on 31 December 2016.

(2) On 1 January 2016 Bindaree Ltd issued 2,000 4% £100 convertible bonds. Each bond
is redeemable in three
shares. Interest is payable annually in arrears. The market rate of interest for similar
bonds without the conversion option is 5% pa. The annual interest on the bonds was
paid on 31 December 2016.

(3) Bindaree Ltd also prepares consolidated financial statements. On 1 January 2016
Bindaree Ltd purchased 70% of the ordinary shares of Kilmore Ltd. The fair value of the
consideration has been correctly calculated at £252,000. Kilmore Ltd ement of
financial position as at 31 December 2015 included net assets of £679,800. Bindaree
Ltd recognises goodwill and non-controlling interests using the proportionate method.
The following information may be relevant to calculating goodwill on acquisition:

Kilmore Ltd is expected to make losses for the next few years. The directors of
Bindaree Ltd have estimated that losses of £750,000 will be made before Kilmore
Ltd returns to profit. In order to improve the performance of Kilmore Ltd the directors
of Bindaree Ltd intend to reorganise Kilmore Ltd. The implementation of this
reorganisation plan is expected to cost £100,000, an amount which is not included
in the losses above.

financial statements for the year ended 31 December

2015 include reference to a contingent liability disclosed in accordance with IAS 37,
Provisions, Contingent Liabilities and Contingent Assets. This relates to a legal
claim brought against the company in October 2015, the outcome of which is
dependent on a future court case. The note states that it is estimated that an
amount of £500,000 may become payable. The fair value of this contingent liability
as at 1 January 2016 was £200,000 and this is considered to be a reliable estimate.

-current assets at 31 December 2016 do not include any amount

An independent valuation attributed a value of
£50,000 to this list at 1 January 2016.

Requirement

Explain the required IFRS financial reporting treatment of matters (1) to (3) in the
consolidated financial statements for the year ended 31 December 2016, preparing all
relevant calculations.
Total: 22 marks

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